ViacomCBS closed down 27.3% for the day, to $48.23 per share, coming after big drops earlier this week in the wake of the company’s announcement that it would sell up to $3.45 billion in stock. Discovery dropped 27.5%, closing at $41.90 per share.
Both companies had seen their stocks more than double in price in 2021 with the launch of new subscription streaming plays — Discovery Plus debuted in January, and ViacomCBS’ upsized Paramount Plus launched March 4. Viacom shares peaked at $100.34 at Monday’s close, giving it a market valuation nearly 25 times analyst estimates for 2021 adjusted earnings, according to Bloomberg data. Discovery was trading at a multiple 27 times EBITDA forecasts with an all-time high price of $77.27 per share March 19.
The steep declines for ViacomCBS and Discovery came after several analyst downgrades on the companies. The latest came from the team at Wells Fargo, which on Friday cut ViacomCBS from “equal weight” to “underweight” and lowered Discovery from “overweight” to “equal weight.”
“While we don’t think these media stocks will go back to their historical low levels due to more [direct-to-consumer] and the potential for an enduring nonfundamental premium,” Wells Fargo lead analyst Steven Cahall wrote, “we do see gravity pulling the multiples closer to prior norms.”
That said, Wells Fargo is upbeat on the prospects for Discovery Plus after a “strong start to the year” and pending international expansion with the Olympics. “We like the fact that Discovery Plus is a primarily incremental strategy and value it a premium on subs to peers,” Cahill said. “We also think DISCA has less core risk due to no licensing, set affiliate price increases, more international exposure and a bit more recovery momentum due to relative ad exposure.”
The drop in ViacomCBS and Discovery shares Friday also stemmed from “large block trades” on both securities by Goldman Sachs and Morgan Stanley, Bloomberg reported, citing an anonymous source.
Discovery issued a statement Friday saying that “today’s trading activity is not the result of insider transactions or transactions by Advance/Newhouse Programming Partnership or its affiliates.” The media company added that it “is confident in and pleased with the execution of its strategy, both with respect to its traditional business and the direct-to-consumer roll out.” Discovery plans to release first-quarter 2021 results on May 10.
Meanwhile, on Thursday, analyst firm MoffettNathanson downgraded ViacomCBS from “neutral” to “sell” and lowered its price target by to $55 per share (down from $67).
After “digging deeper into the linear to DTC economic trade longer-term for ViacomCBS, we are left
questioning how this will end up as a good trade,” analyst Michael Nathanson wrote. He also cited “increased worries” about linear affiliate fee growth, saying that ViacomCBS (and NBCUniversal) run a greater risk getting dropped by pay-TV providers and/or suffering lower annual price escalators because they are shifting premium content to their DTC platforms.
Moreover, “We never, ever thought we would see Viacom trading close to $100 per share. Obviously, neither did ViacomCBS’ management as they appropriately sold ~$3 billion worth of stock/converts at the elevated levels to help clean up their levered balance sheet and invest more in streaming.”
On Tuesday, UBS Securities’ John Hodulik cut his rating on Discovery from “neutral” to “sell,” telling clients the upside potential from the company’s streaming business was “more than priced in at current levels.”
On the other hand, Discovery is in a better position than some cable-centric peers, with a content library that is “largely unencumbered” by licensing deals and an already-sizable international footprint. However, Hodulik wrote, “While Discovery Plus appears off to a strong start, we remain concerned regarding the ultimate scalability of the service in relation to the decline of the linear [TV] business and longer-term impact on financials.”