Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Is Reddit Right About Discovery Inc.?

The Reddit community has been crazy about Discovery Inc. (NASDAQ: DISCA) in recent weeks.

For example, Discovery (DISCA) shares shot up to $77.27 on 19 March 2021. Then Discovery shares fell to $39.01 on 27 April 2021. Investorplace blames social media and stories of hedge fund trades for Discovery’s recent price surge and collapse.

Predictably, Mr. Market pays more attention to the Reddit rumor mill than Discovery’s financial numbers. Notably, Reddit’s quarterly income fell from $705 million on 31 December 2019 to $488 million on 31 December 2020. In addition, the quarterly gross profit fell from $1.497 billion in December 2019 to $1.394 billion on 31 December 2020.

Conversely, Discovery’s quarterly revenues rose slightly from $2.868 billion on 31 December 2019 to $2.881 billion on 31 December 2020. Thus there has been a little a growth at Discovery Inc. (DISCA).

What is Discovery Inc?

So what is Discovery Inc, and why do Mr. Market and his friends on Reddit love it?

Discovery Inc is an American media company that owns many cable TV channels and digital properties. Discovery’s holdings include The Discovery Channel, GolfTV, TLC, MotorTrend, the Oprah Winfrey Network, Travel Channel, Animal Planet, Seicnece Channel, The Food Network, HGTV, Eurosport, the Cooking Channel, the Go Portfolio of Apps, and the Discovery+ streaming service.

Despite its pretensions of being fact-based TV, Discovery is a bottom=feeding company that attracts ratings with sensational programming. Typical Discovery offerings include show high-brow programming as Worst Cooks in America, 90 Day Fiance Happily Ever After?, Sister Wives, and Extreme Sisters.

How Many People watch Discovery’s networks?

Discovery claims to offer over 8,000 hours of original programming a year in in over 220 countries almost 50 languages.

Discovery claims three of its channels; the Food Network, HGTV, and TLC, attracted 16 million viewers on 18 April 2021. Discovery Chief US Advertising Sales officer Jon Steinlauf claims the Discovery networks attract 173 million consumers a month in the United States.

In contrast, ShowBuzzDaily estimates only two Discovery Networks shows attracted over one million viewers on 22 April 2021. Those shows were House Hunters International with 1.455 million viewers and House Hunters with 1.459 million viewers.

How Effective is Discovery’s Advertising?

In theory, Discovery’s networks and apps can attract an enormous number of eyeballs. However, the value of those eyeballs is questionable.

For instance, advertisers will ask how much money do people who watch Sister Wives have? Conversely, HGTV (Home and Garden TV) could attract viewers advertisers such as The Home Depot (HD) want.

Unfortunately, cynical advertisers will ask, “why should I spend money to advertise on a network that attracts only one million viewers in a nation with 331 million people?” That is a fair question, there are other advertising methods, YouTube, Google, digital ads, etc., that could be cheaper and more effective.

For instance, targeted ads on YouTube how-to videos could be effective in reaching potential Home Depot customers. To explain, a person looking at a how to build a shed video could be more likely to buy lumber, tools, nails, and paint than somebody binge watching House Hunters or Hometown on HGTV.

Digital is King in Advertising

Notably, PwC estimates US digital advertising spending grew by 12.2% in 2020, CNBC reports. The Interactive Advertising Bureau (IAB) estimates 78.1% of that spending went to 10 companies.

The largest recipient of US digital spending in 2020 was Google with 28.9% of the market, eMarketer estimates. The second largest recipient was Facebook (FB) with 25.2% of the market. Amazon (AMZN) was third with 10% of the market.

Thus, the largest growing advertising area digital is outside of Discovery’s traditional business model. Cynics will ask what value Discovery has.

How Much Money Does Discovery Inc. Make?

Discovery (NASDAQ: DSCB) made less money in 2020. For instance, Discovery’s quarterly operating cash flow fell from $1.232 billion on 31 December 2019 to $553 million on 31 December 2020.

Hence, Discovery’s final 2020 quarterly cash flow was less than half what it reported a year earlier. Similarly, Discovery’s quarterly ending cash flow fell from $739 million in December 2019 to $166 million in December 2020.

The only good cash news is at Discovery is the company maintained a negative financing cash flow through 2020. For instance, Discovery reported a -$739 million quarterly financing cash flow on 30 June 2020. The quarterly financing cash fell to -$277 million on 31 December 2020.

That means Discovery paid its debts during a pandemic. However, Discovery’s total debt fell slightly in 2020. In detail, Discovery debt fell from $16.372 billion on 31 December 2019 to $16.308 million on 31 December 2020.

What Value Does Discovery Inc. Have?

On paper, Discovery (DISCA) added value in 2020. For instance, Discovery’s total assets grew from $5.217 billion on 31 December 2019 to $6.13 billion on 31 December 2020.

Similarly, Discovery’s cash and short-term investments grew from $1.563 billion on 31 December 2019 to $2.39 billion on 31 December 2020. Thus, Discovery had more cash and value even as it made less money.

In the final analysis, I think Mr. Market overvalued Discovery at $39.01 on 27 April 2021. I think Discovery is a declining company in a shrinking business. I advise investors to avoid Discovery because I think cable will soon follow newspapers into oblivion.

My prediction is that Discovery will die fast as digital eats all the advertising dollars, leaving companies such as Discovery with no cash to operate. Under those circumstances, Discovery will become a junk stock.