Discovery shares could climb to $45

Discovery Inc (NASDAQ: DISCA) has had a fantastic start to the year with the stock up nearly 25% already, but BofA Securities says it’s just a trailer of what is to come later this year.

Discovery upgraded to ‘buy’ at BofA Securities

In a note on Friday, BofA Securities’ Jessica Reif Ehrlich upgraded Discovery to “buy” with a price target of $45 that represents a 50% upside from here. Previously, she had a PT of $34 on the stock.

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The bullish call is primarily based on Discovery’s pending merger with WarnerMedia that she expects will create the most dynamic global media company. The analyst wrote:

Warner Bros. Discovery could create a global media powerhouse driven by creative and content leadership. WarnerMedia has film and TV studios, other entertainment assets and a deep library, while DISCA’s portfolio of proven lifestyle, reality-TV and unscripted brands have notable strength.

The $43 billion deal is expected to complete by mid-2022. Also on Friday, Brahman Capital Corp increased its stake in Discovery from 1.76% to 5.26%, as per data from FactSet.

Discovery has a favourable risk/reward ratio

According to Ehrlich, Discovery has a favourable risk-to-reward ratio, and the merger will open new doors of incremental revenue for the combined entity. She added:

We view DISCA’s initial cost synergy target of $3.0 billion as highly achievable, if not conservative. We see several areas for incremental revenue opportunities like scale in advertising/distribution, pricing, advertising-based video-on-demand etc.

Streaming is a competitive space, especially since the onset of the COVID pandemic. Yet, Discovery CEO David Zaslav expects the newly launched direct-to-consumer streaming service, Discovery+, to rival established giants like Netflix and Disney+ globally.

Earlier this week, Wells Fargo’s Steven Cahall also said Discovery should be on everyone’s radar for 2022.