Discover
company’s stock jumped by more than 10% instantly on the New York exchange.
Such a rapid increase is remarkable in itself, but there is more to it. Let’s
find out why investors should pay attention to this company and its stock.
Discover
(also known as Discover Financial Services) is a large financial conglomerate
specializing in credit cards, operating its own bank and payment networks, and
providing various related services. What’s particularly important here is its
credit card business and associated operations. Despite the fact that Discover
is one of the leading card makers in the US, it still trails behind Visa and
Mastercard, it’s in the running for the third place.
The
driving force behind the growth in Discover stock growth is the news that
another major player in the US top 10 credit card issuers and banks, Capital
One, is going to acquire Discover for $35 billion. This news, while not
typically highlighted on the economic
data calendar alongside macroeconomic events, had a significant
impact on asset prices, causing them to soar.
By the
way, even prior to this increase, Discover stock had been demonstrating active
growth – almost 40% over the past six months.
This
performance is grabbing attention; however, it’s essential to consider future
prospects. The merger of two major players in the US credit
card industry could potentially create a significant new competitor in the
market long dominated by Visa and Mastercard.
However,
right now, it’s too early to consider the deal as a fait accompli. There is a
long way ahead where the buyout will be meticulously scrutinized by the US
regulators, particularly those focused on the financial sector. However,
officials might find themselves at a crossroads. On the one hand, consolidating
two major players is typically viewed as undesirable. On the other hand,
there’s hope that the combined entity could introduce more competition to
challenge the dominance of Visa and Mastercard, thereby making the market less
monopolistic.
It does
not matter if we believe in the potential success of the merger or not; this is
definitely a situation where investors should closely monitor all related
developments. Depending on the regulatory outcome, stock prices could fluctuate
significantly in either direction. However, many analyst firms have already
adjusted their consensus forecasts for Capital One: for example, RBC
raised theirs to $150 from $142, Evercore ISI lowered theirs to $142 from $160,
and Citigroup increased theirs to $165 from $152.
As
evidenced by the diverse opinions of experts, it’s clear that careful analysis
is crucial before making any trading decisions.