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ViacomCBS headquarters in Midtown Manhattan.
Mark Kauzlarich / Bloomberg
Sometimes it doesn’t take much to cool a piping hot broth when momentum runs out. That is evident at
ViacomCBS
and
Discovery
this week. Both had shed a tear in recent months as investors stacked their previously unloved stocks.
The two older media companies have embarked on new streaming services and unveiled ambitious long-term subscriber targets that have clearly thrilled investors, while reopening optimism has benefited value stocks in a broader sense.
Now, some modest negative news on both has led to a violent downturn in their stocks.
ViacomCBS
stock (ticker: VIAC) closed more than 23% on Wednesday after the media company priced an offer of its stock below the latest market price. It follows a 9% drop on Tuesday, and a monstrous rise before that: stocks had doubled since the beginning of February and are up nearly nine-fold from their low at the end of March 2020. It was the best-performing
S&P 500
component since March 23, 2020 until Tuesday.
The ViacomCBS stock closed above $ 100 on Monday before falling to $ 70.10 on Wednesday amid heavy trading volume. That’s a painful drop, but will not bring the stock back to where it was traded about three weeks earlier.
On Monday night, ViacomCBS filed to raise approximately $ 3 billion through the sale of Class B non-voting common stock and convertible preferred stock. It announced the pricing of those two offers on Wednesday, and it appears institutional investors were unwilling to keep the stock’s rally going. The common stock offering of 20 million shares costs $ 85 a pop, or about 7% below its closing price of $ 91.25 on Tuesday. The company had hoped to raise closer to $ 2 billion from its common stock sales, versus $ 1.7 billion it sells.
The preferred stock offering is priced at an annual yield of 5.75%. The shares will convert into Class B common shares in 2024 at a rate of between approximately 1 and 1.2, depending on the price of the common shares at the time. The preferences of ViacomCBS are traded under the ticker VIACP.
Both ViacomCBS offers are expected to close by the end of the week. They represent less than 6% dilution at current levels.
The Discovery Stock (DISCA) has also interrupted its roaring rally this week. At a record high of $ 77.27 on Friday, the stock had returned nearly 300% since early November. They were down 3.4% on Monday, 4% on Tuesday and 13.6% on Wednesday. Still, those declines have only wiped out gains since March 3.
The trigger for the Discovery stock’s fall may have been a downgrade from
UBS
on Tuesday. Analyst John Hodulik switched to a Sell rating, from Neutral, citing valuation issues even after a strong start for Discovery +.
“Against a background of shifting media consumption and declining the linear ecosystem, we believe the pivot from Discovery to DTC is the right one,” Hodulik wrote. “At the same time, we expect investments for DTC to weigh on deteriorating trends in the linear ecosystem [profit] medium-term growth. With stocks at an all-time high and the implied valuation of the streaming business trading well above Netflix [NFLX] multiples, we believe that the stock at current levels represents an unattractive equation between risk and reward. “
Hodulik estimated that the market valued Discovery’s streaming business at about 20 times its 2023 revenues, which is on par with
Netflix
(NFLX) trades at 6 to 10 times the expected revenue over the past three years.
For both ViacomCBS and Discovery stocks, the streaming optimism may have just become overblown. With double-digit gains every week, the pool of investors willing to keep piling up at ever-higher valuations shrank.
“To positively impact ViacomCBS’s current valuation requires the strong belief that Paramount + will become a top global streaming service, something we consider speculative at this point,” Credit Suisse analyst Douglas Mitchelson wrote in a report. on Monday. “It is rare that we come across a fundamentally based investor (growth or value) at this point who owns ViacomCBS, and instead see momentum-driven investors coming in – to quote Yogi Berra: is busy. ‘ ”
It didn’t take much bad news to push them to the exits.
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