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ViacomCBS headquarters in Midtown Manhattan.
Mark Kauzlarich / Bloomberg
Sometimes it doesn’t take much to cool down a red-hot action once its momentum is depleted. That seems to be the case with
ViacomCBS
Y
Discovery
this week. They had both been crying in recent months as investors piled on their previously unloving stocks.
The two legacy media companies have started new streaming services and revealed ambitious long-term subscriber goals that clearly have investors excited, while reopening optimism has benefited value stocks more broadly.
Now, some modest negative news about each of them has caused violent reversals in their actions.
ViacomCBS
The shares (ticker: VIAC) closed more than 23% lower on Wednesday after the media company set an offer of its shares below its latest market price. It follows a 9% drop on Tuesday and a monstrous rally before that: The stock had doubled since the beginning of February and rose almost nine times from its low in late March 2020. It was the best performance
S&P 500
component from March 23, 2020 through Tuesday.
ViacomCBS shares closed above $ 100 on Monday, before falling back to $ 70.10 on Wednesday due to heavy trading volume. That’s a painful drop, but it only leads the stock to where it was about three weeks earlier.
On Monday night, ViacomCBS submitted an application to raise about $ 3 billion through sales of Class B non-voting common shares and convertible preferred shares. It announced the price of those two offerings on Wednesday, and it appears institutional investors were unwilling to sustain the rally in stocks. The common stock offering of 20 million shares at a price of $ 85 each, or 7% below its closing price of $ 91.25 on Tuesday. The company expected to raise about $ 2 billion from the sale of common stock, up from $ 1.7 billion it is selling.
The preferred stock offering has an annual yield price of 5.75%. The shares will convert to Class B ordinary shares in 2024 at a rate of between approximately 1 and 1.2, depending on the price of the ordinary shares at that time. ViacomCBS preferences will be traded under the symbol VIACP.
Both ViacomCBS deals are expected to close by the end of the week. They represent a dilution of less than 6% at current levels.
Discovery (DISCA) shares have also seen their strong rally interrupted this week. With a record close of $ 77.27 on Friday, the stock had returned nearly 300% since the beginning of November. They fell 3.4% on Monday, 4% on Tuesday and 13.6% on Wednesday. Still, those drops wipe out only gains since March 3.
The trigger for the fall in Discovery shares may have been a downgrade of
UBS
on Tuesday. Analyst John Hodulik moved to a Sell rating from Neutral, citing valuation concerns even after a strong start for Discovery +.
“In a context of changing media consumption and declines in the linear ecosystem, we believe Discovery’s turn to DTC is the right one,” wrote Hodulik. “At the same time, we expect investments for DTC and worsening trends in the linear ecosystem to influence [profit] medium-term growth. With stocks at all-time highs and the implied valuation of the streaming business, it trades well above Netflix. [NFLX] multiples, we believe the stock presents an unattractive risk-reward equation at current levels. “
Hodulik estimated that the market valued Discovery’s streaming business at roughly 20 times 2023 revenue, which compares to
Netflix
(NFLX) trading 6-10 times your estimate of future earnings over the past three years.
For ViacomCBS and Discovery stocks alike, the broadcast optimism had perhaps simply become overblown. With each week of double-digit gains, the pool of investors willing to keep piling up ever higher valuations shrank.
“To see the benefits of ViacomCBS ‘current valuation requires a strong belief that Paramount + will become a superior global streaming service, something we find speculative at this time,” Credit Suisse analyst Douglas Mitchelson wrote in a report. Monday. “It’s rare that we meet an investor based on the fundamentals (growth or value) that ViacomCBS owns at this point and instead see the arrival of momentum-driven investors, to quote Yogi Berra, ‘Nobody he goes there because there are too many people. ‘
It didn’t take much bad news to send them shoving out of the exits.
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