Let's talk about the popular Discovery, Inc. (NASDAQ:DISC.A). The company's shares received a lot of attention from a substantial price movement on the NASDAQGS over the last few months, increasing to US$30.18 at one point, and dropping to the lows of US$24.58. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Discovery's current trading price of US$24.83 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Discovery’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
What is Discovery worth?
According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Discovery’s ratio of 13.27x is trading slightly below its industry peers’ ratio of 15.04x, which means if you buy Discovery today, you’d be paying a reasonable price for it. And if you believe Discovery should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Although, there may be an opportunity to buy in the future. This is because Discovery’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
What does the future of Discovery look like?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 23% over the next couple of years, the future seems bright for Discovery. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.
What this means for you:
Are you a shareholder? DISC.A’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at DISC.A? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?
Are you a potential investor? If you’ve been keeping an eye on DISC.A, now may not be the most optimal time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for DISC.A, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Discovery has 1 warning sign we think you should be aware of.
If you are no longer interested in Discovery, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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