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Discovery, Inc. (NASDAQ:DISC.A) is Leading the Rebound Among the 2021 Underperformers

·3 min read

This article first appeared on Simply Wall St News .

Discovery, Inc . ( NASDAQ: DISC.A ) made the headlines in the March of the last year, as it was part of the highly levered portfolio that caused the demise of Archegos Capital.

After losing over 50% in a matter of days, the stock continued a slow and uneventful slide for the rest of the year. Yet, favorable valuation and pending merger are leading the rebound.

See our latest analysis for Discovery .

Merger on the Horizon

After getting battered for most of the last year, Discovery is already up 25% year-to-date, including an impressive 16.87% rally on Friday.

These moves rarely go unnoticed for multi-billion dollar companies, so it is not surprising that Discovery attracted price revisions and a rating boost from Bank of America . Their analyst Jessica R. Ehrlich sees it as an attractive opportunity, especially given the cost synergy regarding the potential merger with Warner Media. BofA now rates the stock as a Buy, with the new price target of US$45.

European Commission approved the deal , concluding that the proposed deal would not cause competition concerns. While there still needs to be a shareholder vote, the merger deal might close in about 3 months.

What is Discovery worth?

The stock's ratio of 17.89x is currently above the industry average of 12.74x, meaning that it is trading at a higher price than its peers. But, according to our discounted cash flow model , it is still trading below its intrinsic value.

Given that Discovery's share is relatively volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from Discovery?

earnings-and-revenue-growth
earnings-and-revenue-growth

Future outlook is an important aspect when you're 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 matters the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by a double-digit 11% over the next couple of years, the outlook is positive 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? Discovery's optimistic future growth appears to have been factored into the current share price, with shares trading above industry price multiples. Shareholders may be asking a different question at this current price – should I sell? If you believe Discovery should trade below its current price, selling high and repurchasing it up again when it reverts could be profitable But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If the latest move of Discovery caught your eye, you might be tempted to start buying. Before you do so, you might research the fine details of the merger, especially if you already own AT&T (NYSE: T), the parent company of Warner Media. Although the union looks to be on the cards, it is not a done deal until it is.

If you want to dive deeper into Discovery, you'd also look into what risks it is currently facing. Be aware that Discovery is showing 2 warning signs in our investment analysis and 1 of those can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article 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.