UPDATED with closing price. Discovery’s stock stagnated Thursday despite gains in the broader markets after the company’s streaming pitch left Wall Street with plenty of questions about the company’s strategic direction.
Shares in the company got a small bounce after the three-hour presentation surrounding Discovery+ on Wednesday afternoon, gaining 2.5% in a late-session rally. They finished Thursday’s trading day at $28.31, down a fraction. The stock had gained 20% since early November as investors looked forward to the streaming news.
Analysts did generally acknowledge that the streaming service will bring significant heft when it launches on January 4. With about 55,000 hours of programming and 50 original series, it will have pretty clear appeal to “super-fans” of the company’s unscripted offerings. But the financial community remains unpersuaded that a $5-a-month streaming service can be “a big enough lifeboat” for Discovery as it looks to “survive and thrive in the rough waters of a declining linear TV universe,” as MoffettNathanson’s Michael Nathanson put it.
“Given that Discovery did not provide long-term financial targets” on Wednesday, Nathanson noted in a blog post, “analysts and investors will have to determine on their own” if the company will succeed. The analyst, who has a “neutral” rating on the company’s shares, does see big potential overseas, where there are fewer major streaming competitors than in the U.S. “If we take a longer-term view, we think that there is a risk that we are underestimating the opportunity for growth outside the U.S. where there isn’t a clear No. 2 to Netflix and where Discovery has a long tenure of local language content and branding,” he wrote.
Todd Juenger of Bernstein Research, a longtime bear on cable programmers like Discovery (he rates its shares “underperform”) also pinpointed the lack of guidance from the company as an issue. In a note to clients, he said Disney “set the bar” for presenting a detailed financial outlook at its April 2019 investor day touting the launch of Disney+. (That event lifted Disney shares 10% the next day.) “If management doesn’t have enough confidence to provide a guidance range, then why should the public markets choose their own subs/arpu/revenue expectation and price it into the stock, today?” Juenger wondered.
His longer-term concern about Discovery is that its networks are fully distributed globally, in some 200 countries. That means that as the company trades higher-margin pay-TV subscribers for lower-margin streaming ones as cord-cutting continues, it will ultimately, in Juenger’s view, see its famous “free cash flow machine” start to sputter.
Eric Handler of MKM Partners pronounced himself “excited about the long-term growth potential” in a note to clients, but downgraded his rating on Discovery stock to “neutral” from “buy” based on concerns about expenses. Not only is the company migrating from the fat profit margins of pay-TV (58% in the U.S. in 2019) to the more tenuous economics of streaming, but “spending levels in promoting this service will prove significant as scale is sought out,” he wrote.
Advertising will be a key part of the new service, with brands like Lowe’s and Pepsi onboard as launch sponsors and executives asserting that they will be able to charge three times its linear TV ad rates on Discovery+. But one media agency executive sees a potential flaw in the company’s sales pitch. Networks like HGTV, Food Network or TLC are generally “ambient or genre-based viewing,” in the exec’s estimation, as opposed to the “appointment-based, must-have” content that compels viewers to subscribe. Therefore, “the underlying premise of Discovery+ is likely the factor that will most constrain it.”
One upbeat reaction to the presentation came from Guggenheim’s Michael Morris. The analyst boosted his 12-month price target on Discovery to $28 from $22.50, “reflecting our belief that the company’s DTC initiative is the proper strategic move,” he explained in a note to clients. Morris retained his “neutral” rating on the company’s shares “as the long-term return on the investment remains uncertain.”
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