What happened
Shares of Discovery (NASDAQ:DISCA) (NASDAQ:DISCK) gained 37.7% in value last month, according to data provided by S&P Global Market Intelligence. Investors have high hopes that Discovery can accelerate growth after launching the discovery+ streaming service in December.
On Jan. 4, the service launched in the U.S. Discovery also announced a continuation of its partnership with Vodafone Group that will bring discovery+ to wireless customers in 12 markets across Europe.
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So what
Discovery+ enters the streaming market loaded with content from the company's network lineup, including HGTV, Food Network, TLC, Travel Channel, Discovery Channel, and Animal Planet, among others.
While traditional television is still relevant, cable is expensive and is losing the value proposition to streaming. eMarketer estimated that 31.2 million households will have cut cable through 2020, and that total is expected to rise, reaching 46.6 million by 2024. That's a shrinking market for Discovery's cable channels.
Meanwhile, Netflix and Walt Disney continue to reel in subscribers by the millions to their respective streaming services. Discovery doesn't have the storytelling chops of those services, but it has leading network brands for those seeking nonfiction content that should make its streaming service successful.
Now what
Discovery has an advantage in having a massive library of content in local languages around the world. This localized content gives Discovery more than a 30% market share in certain regions, which management will certainly bank on to grow discovery+.
The launch of Discovery's streaming service, along with an improving outlook for television advertising in 2021, largely explains why the stock price rose sharply over the last few months. The shares are also trading in bargain territory at a price-to-free cash-flow multiple of 9.5. That could offer more upside, but Discovery will have to prove that discovery+ can pull in enough subscribers to sustain long-term growth in profits.
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