Discovery: Low Cost Model Makes Current Bet Enticing

Summary
  • The shift away from traditional pay TV to an OTT model has left investors wary of smaller players and how they will adapt to the new environment.
  • Discovery has popular content on its flagship channels and its low cost of content (unscripted business model) should allow for steady fcf through the transition to OTT streaming.
  • Discovery will need to sign up around 15M subs to Discovery+ to offset traditional tv declines.
  • Discovery trades at an EV/EBITDA (TTM) multiple of 7x which is significantly below the industry median of 10x.

Recommendation

Discovery, Inc. is cash flow machine but the changing media landscape has investors nervous smaller players will struggle to deal with the transition from traditional cable/satellite TV to OTT platforms. This has left Discovery trading at some attractive multiples (EV/EBITDA- 7x & P/E- 7x, P/FCF- 6x), all below the industry averages.

While it is true that scale is an essential factor for this transition, Discovery has a library with over 60,000 hours of content and can produce roughly 8,000 hours annually (Discovery owns its content and as the saying goes “content is king”). Discovery’s launch of its own OTT service is expected in Q1 2021 and its low cost of production (unscripted shows), planned niche offering, and expected affordable price point should allow Discovery to create a successful streaming service. Discovery is also still making solid margins in the cable TV business and will continue to do so despite the secular industry shift.

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