A global leader in real-life entertainment, Discovery Inc. (DISCA) in Silver Spring, Md., delivers more than 8,000 hours of original programming each year and has category leadership across deeply loved content genres worldwide. Eurosport, Animal Planet, and Discovery are among the names in the company's portfolio of premium brands. The stock has surged 24.1% in price over the past month to close yesterday's trading session at $30.06.

In addition, its forthcoming merger with WarnerMedia should bring together iconic and globally cherished franchises and brands, allowing it to drive global expansion more efficiently across the combined portfolio.

However, DISCA’s shares have declined 12.6% in price over the past year and 30.7% over the past nine months. Furthermore, the company is currently under investigation for a significant decline in the price of its securities after Goldman Sachs (GS) and Morgan Stanley (MS) reportedly averted billions of dollars in losses on their investments by selling DISCA stocks in late March 2021.

Here is what could shape DISCA's performance in the near term:

Positive Developments

In December, the European Commission (EC) approved DISCA's proposed acquisition of AT&T Inc.'s (T) WarnerMedia business. DISCA expects the WarnerMedia merger to be completed in the middle of the year, subject to Discovery stockholder approval and other standard closing conditions, such as other regulatory clearances.

Also, DISCA and VIZIO announced that discovery+, the ultimate non-fiction, real-life subscription streaming service, is now accessible to millions of VIZIO SmartCast subscribers. VIZIO will include a one-of-a-kind multimedia experience on the SmartCast home screen as part of the launch.

Ongoing Investigation

This month, several law firms began investigating claims on behalf of investors of DISCA. The investigation concerns whether DISCA and certain officers and directors engaged in securities fraud or other illegal business activities. According to reports, Goldman Sachs and Morgan Stanley saved billions of dollars in losses on their Discovery investments by selling the stock in late March 2021, before the market learned that the Archegos Capital Management had failed or was likely to fail to meet a margin call, forcing Archegos to liquidate its position in various companies, including Discovery. This led to a significant decline in DISCA's share price.

Also, in December, Poland's ruling Law and Justice party recommended that firms from outside the European Economic Area be barred from taking control of Polish radio and television stations, which could impact DISCA's TVN network.

Mixed Financials

DISCA's revenue increased 23% year-over-year to $3.15 billion for the third quarter. ended Sept 30, 2021. The company's cash and cash equivalents rose 49% from their year-ago value to $3.12 billion for the nine months ended Sept. 30, 2021.

However, its operating income declined 38% from the prior-year quarter to $329 million. In addition, its net income decreased 48% year-over-year to $156 million, while its EPS declined 45.5% from the year-ago value to $0.24 over this period.

POWR Ratings Reflect Uncertainty

DISCA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DISCA has a D grade for Growth. The company's mixed financials are consistent with this grade.

The stock also has a C grade for Stability, which is justified given its 1.31 beta.

Of the 18 stocks in the F-rated Entertainment – Media Producers industry, DISCA is ranked #9.

Beyond what I have stated above, one can view DISCA ratings for Quality, Value, Momentum, and Sentiment here.

Bottom Line

DISCA is a major player in the worldwide streaming industry, with a presence in over 220 countries. However, analysts expect its EPS to decline 14.1% year-over-year to $2.75 in fiscal 2021. In addition, an ongoing legal investigation and rising competition in the streaming industry could affect its price performance in the near term. So, we believe investors should wait for the company's prospects to stabilize before investing in the stock.

How Does Discovery Inc. (DISCA) Stack Up Against its Peers?

While DISCA has an overall C rating, one might want to consider its industry peer, News Corporation (NWSA), which has an overall B (Buy) rating.

DISCA shares were trading at $28.78 per share on Monday morning, down $1.28 (-4.26%). Year-to-date, DISCA has gained 22.26%, versus a -3.62% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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