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ViacomCBS headquarters in Midtown Manhattan.
Mark Kauzlarich / Bloomberg
Sometimes it doesn’t take much to cool a red-hot stock, since its momentum is running out. This seems to be the case with
ViacomCBS
and
Discovery
this week. Both were in crisis for the past few months, with investors accumulating their previously unloved shares.
The two legacy media companies started new streaming services and revealed ambitious long-term subscriber goals that clearly excited investors, while the reopening of optimism benefited value shares more broadly.
Now, some modestly negative news about each of them has caused violent retractions in their actions.
ViacomCBS
(ticker: VIAC) closed down more than 23% on Wednesday after the media company priced an offer for its shares below its last market price. There follows a 9% drop on Tuesday, and a monstrous recovery before that: stocks doubled since the beginning of February and increased almost nine times over rock bottom at the end of March 2020. It was the best performance
S&P 500
component since March 23, 2020, Tuesday.
ViacomCBS shares closed above $ 100 on Monday, before dropping to $ 70.10 on Wednesday, due to high turnover. It is a painful fall, but it only brings stocks back to where they were traded about three weeks earlier.
On Monday night, ViacomCBS asked to raise about $ 3 billion through sales of Class B non-voting common shares and convertible preferred shares. It announced the price of these two offers on Wednesday and it appears that institutional investors were unwilling to keep the stock up. The 20 million common stock offering costs $ 85 a pop, or about 7% below the closing price of $ 91.25 on Tuesday. The company expected to raise about $ 2 billion from the sale of common shares, against the $ 1.7 billion it is selling.
The offer of preferred shares was valued at an annual yield of 5.75%. The shares will be converted into class B common shares in 2024 at a rate between about 1 and 1.2, depending on the common share price at the time. ViacomCBS preferred shares will be traded under the symbol VIACP.
Both ViacomCBS offers are expected to close by the end of the week. They represent less than 6% dilution at current levels.
Discovery (DISCA) also saw its sharp rise interrupted this week. With a record close of $ 77.27 on Friday, the stock has been back almost 300% since the beginning of November. They fell 3.4% on Monday, 4% on Tuesday and 13.6% on Wednesday. Still, those declines have only eliminated gains since March 3.
The trigger for Discovery’s stock slump may have been a downgrade of
UBS
on Tuesday. Analyst John Hodulik switched to a Sell rating of Neutral, citing valuation concerns, even after a strong start for Discovery +.
“In a scenario of changes in media consumption and declines in the linear ecosystem, we believe that Discovery’s pivot for DTC is the right one,” wrote Hodulik. “At the same time, we expect investments in DTC and the worsening trends in the linear ecosystem to weigh [profit] medium-term growth. With stocks at historic highs and the implicit rating in the streaming business, trading well above Netflix [NFLX] multiple, we believe that the stock presents an unattractive risk-reward equation at current levels. “
Hodulik estimated that the market was valuing Discovery’s streaming business at about 20 times the revenue of 2023 – which compares with
Netflix
(NFLX) trading 6 to 10 times its estimated future revenue in the past three years.
For ViacomCBS and Discovery’s shares, streaming optimism may have simply become overblown. With each week of double-digit gains, the pool of investors willing to continue accumulating increasingly higher valuations has become smaller.
“To see the positive side of ViacomCBS ‘current assessment requires a strong belief that Paramount + will become a top global streaming service, something we consider speculative at this point,” wrote Credit Suisse analyst Douglas Mitchelson in a report in Monday. “It is rare to find a fundamentally based investor (growth or value) possessing ViacomCBS at this point and, instead, to see impulse-driven investors arriving – to quote Yogi Berra, ‘Nobody goes there anymore because it is too crowded'”.
It didn’t take long for bad news to send them out.
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