US stock Discovery (NASDAQ:DISCA) is one I have on my buy list. Media giant Discovery is one of the US stocks crushed by the recent liquidation of Archegos Capital Management.
US stocks plummet
Archegos was believed to be managing around $10bn in family money, which it invested in the international public markets. But its founder Bill Hwang was fond of leverage and borrowed multiple times his firm’s worth to build massive stock positions. When the company faced a margin call last month, it led to an unravelling of the firm’s positions, resulting in a major collapse in many big-name US stock prices.
Discovery’s share price fluctuates
When Discovery’s share price began to plummet, the rumour-mill went into overdrive and worries of undisclosed issues led to further losses. Those concerns appear to have diminished, and I think Discovery looks like a good long-term portfolio addition.
The DISCA share price has fallen 46% from its 52-week high and is up 126% from its 52-week low.
The Discovery Channel was founded in 1985 and has grown into the massive global media enterprise we see today. This US stock mainly generates its revenues from advertising and distribution. 2020 revenues came in around $10.6bn with $5.5bn from advertising and $4.8bn from distribution. The other $0.3bn came from smaller investments such as its stake in FuboTV.
Covid-19 has affected its operations, causing delays in filming. This led FY20 free cash flow to fall nearly 25% year-on-year, but total US networks revenue only declined 2%.
Discovery following in Disney’s footsteps
As Disney has shown us with Disney+, original content is gold. And this is something Discovery has in spades.
Discovery+ is its own-brand streaming service that launched in January. The company is popular for its non-fiction brand of content including, travel, animal and cookery programmes and home renovation content. These fact-based programmes are relatable, and suitable for family viewing. They offer viewers easy escapism where they can switch off, knowing they won’t be left emotionally affected by their viewing activity.
It’s a format that’s been steadily growing in popularity in recent years, and Discovery arguably has the market cornered. Its TV brands include its namesake, the Discovery Channel, HGTV, Food Network, TLC, Travel Channel, Animal Planet, and the hugely popular OWN: Oprah Winfrey Network. It has more content in the pipeline and a growing list of partnerships. It’s already partnered with Amazon Fire TV, iPhone, Apple TV, Chromecast, Microsoft Xbox One, Roku, Verizon and much more. And it’s also in a decade-long contract with the BBC, which is providing natural history and factual content.
Risks facing Discovery shareholders
Nevertheless, Discovery has a considerable level of debt. And it doesn’t offer shareholders a dividend. A high level of competition in the streaming space could lead to price wars, although Discovery’s unscripted content tends to have higher margins than its rivals’ scripted content. At the same time, if Discovery+ fails to attract and retain subscribers, this will be bad for business. There’s also a high level of short interest in the stock, which could contribute to volatility in the near term.
But I think this is a strong company that will stand the test of time. I think its hold on the unscripted TV niche will lead to growth in its subscription revenues. That’s why I’d happily add it to my long-term portfolio with a five-to-ten-year time horizon.
