Shares in ViacomCBS and Discovery — which led a remarkable surge in traditional media shares in 2021 — continued a week-long slide Friday as Wall Street analysts doled out downgrades saying the prices had gotten ahead of the fundamentals.
Less than two weeks after hitting all-time highs, both stocks entered the home stretch of the trading day down by about 30%. ViacomCBS was changing hands $46.90 and Discovery at $40.62 with less than hours left in the session. Trading volume has been high, several times normal levels, as investors back away on the latest downgrades by Wall Street analyst.
Both stocks have dropped between 40% and 50% since the start of this week.
The stocks had decidedly not been favorites last year but investor enthusiasm turned up, way up, after the successful launches of streaming services Discovery+ and Paramount+. Wall Street applauded the DTC push fueled by content war chests as finally executing a long-discussed pivot away from the still-lucrative but eroding traditional pay-TV business.
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Disney has been the poster child for Wall Street’s premium on streaming. The blockbuster rollout of Disney+ spread a sustained, tech-like halo on the company’s shares despite major challenges in many other areas.
With ViacomCBS, however, investors grew skittish at the rapid runup of the stock and some worried about execution given tough competition from Netflix and Disney+. Wells Fargo’s Steven Cahall downgraded the shares to “underweight” from “equal weight” and slashed his 12-month price target to $59 from $82. He also dropped Discovery to “equal weight” from “overweight” with a $59 price target — down from $65.
In a note to clients, he sees “gravity pulling the multiples closer to prior norms” — albeit not falling ” to their historical low levels.”
The Wells Fargo move followed a couple of harsh notes on the companies from MoffettNathanson analyst Michael Nathanson and John Hodulik of UBS.
In a lengthy report titled “U.S. Media: A Return of the ‘Haves’ and ‘Have-Nots,’” Nathanson on Thursday downgraded ViacomCBS to “sell” from “neutral.” He thinks a few companies like Disney, AMC Networks — and Discovery — “can benefit from a measured shift from linear to DTC economics, while the rest of the sector appears to be more challenged.”
ViacomCBS is not not among them for a few reasons, including it’s commitment to pay billions to keep NFL rights through 2033 along with investing significant sums in Paramount+. Nathanson don’t see the numbers adding up in the company’s favor as it trades linear distribution fees for direct-to-consumer subscription revenue. “We have increased worries about pressure on the company’s linear affiliate fee negotiations post the NFL announcement,” he wrote.
ViacomCBS began its slide after announcing plans early this week to sell $3 billion worth of stock. In a note Tuesday, AB Bernstein analysts said they supported the move to invest in streaming or provide a cash cushion. But they also found the stock stock “significantly over-priced” warned of “insurmountable structural headwinds ” and intense competition in streaming.
In downgrading Discovery to “sell” earlier this week, Hodulik reasoned that the benefits of the company’s recently launched Discovery+ service have already been priced into the stock price. “While Discovery+ appears off to a strong start, we remain concerned regarding the ultimate scalability of the service in relation to the decline of the linear business and longer term impact on financials,” he said.
Last week, BMO Capital analysts moved to an “underperform” from a “market perform” rating on ViacomCBS. Previously, Citigroup went from “buy” to “neutral” on Discovery.
Jill Goldsmith contributed to this report
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