Discovery’s Solid DTC Strategy Bodes Well, Say Analysts

Discovery’s (DISCA) expanding popularity can be attributed to the solid viewership of its strong portfolio of channels, which includes Discovery Channel, Animal Planet, Food Network, HGTV, MotorTrend, Science, TLC, and Oprah. Notably, the coronavirus outbreak has boosted the viewership.

Moreover, its direct-to-consumer (DTC) streaming service, discovery+, is going strong since its launch in January this year. Notably, the company ended the second quarter of 2021 with 17 million paying DTC subscribers, as revealed in its quarterly results released on August 3. (See Discovery stock chart on TipRanks)

Nonetheless, Discovery intends to ramp up its investments in growth initiatives to the tune of $1 billion in 2021. The company maintained that its investments are expected to peak this year due to discovery+ losses, along with $160 million of losses from Olympics, and sports rights expected in the third quarter. However, strong business leadership is a positive. These observations led Needham analysts, led by Laura Martin, to retain a Hold rating on the stock.

She said, “We expect DISCA to invest heavily in its discovery+ streaming service in 2021, which adds risk to the story in 2021, until we have more data points about adoption rates, churn levels, and SAC.”

However, Discovery’s DTC strategy, in the form of discovery+, prioritizes maximizing revenues per content hour through multiple revenue streams. Higher returns from content spending enable investments in new content, which, in turn, drives higher subscriber additions. This justifies the company’s investment roadmap of its streaming services.

Another fact that encourages the analyst is that Discovery’s channel bundle holds the second biggest piece of the pie in the U.S. TV viewer community. Also, despite taking up 20% of total viewing time, it receives less than 10% of total subscriber fees paid out by linear TV distributors, which is an upside to affiliate fees.

Moreover, the company boasts of more than $1 billion in cost synergies from its acquisition of SNI, which was completed in March 2018. This is expected to reduce year-over-year growth in operating expenses by low to mid-single digits in 2021. Also, this makes Martin look at Discovery as a good investment option.

Consensus among analysts for Discovery is a Moderate Buy based on 5 Buys and 5 Holds. The average Discovery price target of $43.89 implies 55.4% upside potential from current levels.

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.