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Why Discovery Stock Tumbled 12% This Week

What happened

Shares of Discovery (NASDAQ: DISCA)(NASDAQ: DISCK) are down some 12% compared to where they closed trading last Friday, according to data from S&P Global Market Intelligence, reversing a rally that began in December as investors start transitioning away from early pandemic winners.

As Netflix's (NASDAQ: NFLX) just-reported fourth-quarter earnings report shows (and Walt Disney's before it), it's becoming more difficult to attract subscribers to streaming services now that the lockdown phase of the pandemic is well in the rearview mirror and out-of-home activities are fully available again.

The streaming service leader reported 8.3 million net new subscribers in the fourth quarter, lower than the 8.5 million subscribers it had guided toward, marking Netflix's slowest annual growth in six years.

Image source: Getty Images.

So what

Discovery launched its own streaming service, Discovery+, a year ago helping to push shares higher, and then it got caught up in the meme stock trading frenzy as its shares were heavily shorted. The stock went as high as $66 per share as short-sellers unwound their positions, but fell sharply afterward and has been in a downward trend ever since.

The media company's November boost came as a result of adding 3 million more subscribers to its streaming service, though earnings missed analyst projections, and it rallied again in December to over $30 a stub on European Union approval for its acquisition of AT&T's WarnerMedia business and a favorable IRS ruling on the deal, meaning it will be a tax-free transaction.

Yet fears of slowing subscriber growth momentum have been clouding Discovery's stock this week and Netflix's news sent it tumbling. The streaming giant forecast it will add just 2.5 million new subscribers in the first quarter, less than half of what Wall Street was anticipating.

Considering Disney had added just 2.1 million subscribers when it reported results back in November, that doesn't bode well for Discovery when it issues its own earnings report next month.

Now what

While the streaming field is crowded, it's likely to winnow down going forward. As its acquisition of WarnerMedia indicates, some current players are going to exit the space and others will just go under as many pundits have long expected the market can only support so many.

Consumers only have so much disposable income available to allocate to streaming, so only a handful will become the go-to choices. Netflix and Disney seem like obvious picks, along with Amazon's Prime Video, since it's included with the loyalty program, meaning there are only a few slots open to other streaming service stocks.

Discovery is actually well positioned now with the WarnerMedia deal because it will be getting the popular HBO Max service included.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey owns AT&T. The Motley Fool owns and recommends Amazon, Netflix, and Walt Disney. The Motley Fool recommends Discovery (C shares) and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2024 $145 calls on Walt Disney, short January 2022 $1,940 calls on Amazon, and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.


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