Why Discovery Communications Shares Crashed Today

What happened

Actions of Discovery Communications (NASDAQ: DISCA) (NASDAQ: DISCO) today they were sinking again. Investors continued to exit the stocks of suddenly popular legacy media such as Discovery and ViacomCBS (NASDAQ: VIAC), who have recently launched streaming services.

There was no particular news on Discovery, but trading was so volatile that it was temporarily halted this morning. However, Discovery said the volatility was not the result of transactions or insider trading.

As of 1:40 pm EDT, Discovery Series A shares were down 27%, while Series C shares were down 30.9%. Meanwhile, ViacomCBS shares fell by a similar percentage.

Image source: Getty Images.

And that

Trading volume for Discovery shares was extraordinarily high today, approaching 50 million shares by 2pm EDT. This indicates that an institutional investor may have decided to sell part of their stake in the media company.

ViacomCBS shares fell, in part due to a downgrade of Wells fargo, which downgraded its owner rating from Paramount + to underweight. Wells Fargo said that after a recent rise in stocks, momentum in stocks appeared to be waning and their valuation would return to a more normalized level.

As the chart below shows, Discovery has moved almost perfectly in tandem with ViacomCBS, as enthusiasm for the companies’ new streaming services fueled a bullish narrative. However, those gains are fading fast as investors seem to realize that streaming services alone don’t justify tripling the share price in just a few months.

VIAC Chart

YCharts VIAC data.

Now what

The last year has seen the floodgates open in streaming, with services such as Disney+, Apple TV +, Peacock, HBOMax, Discovery + and Paramount + either launching or increasing significantly. In its earnings report for February 22, Discovery said it had logged 11 million subscribers to Discovery +, which launched on January 4, and expected to end the month with 12 million.

However, the streaming economy requires significant scale to turn a profit, as Disney’s streaming division is not yet profitable, even with more than 100 million subscribers. Legacy media companies are essentially shutting down here, speeding up the cutting of wires to build a streaming service.

While Discovery should be rewarded for the strong initial results of Discovery +, the correction is justified because the value of the company has not tripled in just a few months.

This article represents the opinion of the author, who may disagree with the “official” recommendation position for a premium Motley Fool consulting service. We are variegated! Questioning an investment thesis, even one of our own, helps all of us think critically about investing and make decisions that help us be smarter, happier, and wealthier.

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