Why Discovery Stock fell 12% this week

What happened

Shares of Discovery (NASDAQ: DISCA)(NASDAQ: DISC) are down about 12% from where they closed trading last Friday, according to data from S&P Global Market Intelligence, reversing a rally that began in December as investors begin to pull away from the first winners of the pandemic.

Like netflixit is (NASDAQ:NFLX) the just released fourth quarter earnings report shows (and waltz disneybefore), it is becoming more difficult to attract subscribers to streaming services now that the containment phase of the pandemic has passed well into the rearview mirror and out-of-home activities are once again fully available.

The streaming service leader saw 8.3 million net new subscribers in the fourth quarter, down from the 8.5 million subscribers it had been aiming for, marking Netflix’s slowest annual growth in six year.

Image source: Getty Images.

So what

Discovery launched its own streaming service, Discovery+, a year ago, helping to boost stocks, then it got caught up in the stock trading frenzy even as its shares were heavily shorted. The stock hit $66 per share as short sellers unwound their positions, but fell sharply thereafter and has been trending lower ever since.

The media company’s boost in November came as a result of adding 3 million more subscribers to its streaming service, though earnings missed analysts’ projections, and it rebounded again in December at over $30 a stub on European Union approval for its acquisition of AT&Tfrom WarnerMedia and a favorable IRS ruling on the deal, meaning it will be a tax-exempt transaction.

Still, fears of slowing subscriber growth have clouded Discovery’s stock this week and news from Netflix has dragged it down. The streaming giant predicts it will add just 2.5 million new subscribers in the first quarter, less than half of what Wall Street expected.

Considering Disney only added 2.1 million subscribers when it released results in November, that doesn’t bode well for Discovery when it releases its own earnings report next month.

Now what

Although the realm of streaming is crowded, it is likely to shrink in the future. As its acquisition of WarnerMedia indicates, some current players will exit the space and others will simply fade away, as many pundits have long expected the market to only support so many. .

Consumers only have a limited amount of disposable income to allocate to streaming, so only a handful will become the go-to choice. Netflix and Disney seem like obvious choices, with Amazon‘s Prime Video because it’s included in the loyalty program, which means there are only a few slots open for other streaming service stocks.

Discovery is actually well positioned now with the WarnerMedia deal as it will get the popular HBO Max service included.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. 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: $1,920 January 2022 long calls on Amazon, $145 January 2024 long calls on Walt Disney, $1,940 January 2022 short calls on Amazon and $155 short calls from January 2024 on Walt Disney. The Motley Fool has a disclosure policy.

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