Discovery stock was down more than 8% Tuesday after UBS Securities analyst John Hodulik lowered his rating on the shares to “sell” from “neutral,” adding in a research note that gains from the programmer’s streaming services Discovery plus were already baked into the stock.

Discovery shares have been on a run in the past few months, more than doubling from $30.09 on Dec. 31 to $74.65 each on March 22, fueled by the Jan. 4  launch of Discovery Plus. The company said it had about 11 million streaming customers in February well above analyst expectations.

Discovery shares were as low as $68.41 -- down 8.4% or $6.24 per share -- in early trading March 23. The stock closed at $71.68 each on March 23, down 4% or $2,97 per share. 

“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,” Hodulik wrote.

Also Read: Islands in the Streams 

In his note, Hodulik increased his 12-month target on the stock to $46 from $20 each, but warned that cash flow and free cash flow growth would be “flattish” with “moderating growth exiting '21 as cord cutting picks up and early DTC tailwinds fade."

Hodulik was also cautious about the multiple the market has applied to Discovery shares -- more than 20 times free cash flow and 15 times EBITDA -- something that other analysts have also worried about. His new price target is based on a 10 times EBITDA and 14 times free cash flow model. 

The UBS analyst expects Discovery plus to reach 8 million subscribers in the U.S. and 23 million globally in 2021.       

Critics of AT&T’s pending $108.7 billion purchase of Time Warner have pointed to the myriad dangers of consolidating large content and distribution companies – but some analysts say the environment is already headed in that direction.

The U.S. Dept. of Justice has already said it would block the AT&T-Time Warner merger, with the parties scheduled to go to court to state their cases on March 19. Whatever the outcome, the rush for scale won’t be slowed, UBS Securities telecom analyst John Hodulik said.

Related: Feds Lay Out Court Strategy for Blocking AT&T-Time Warner

Hodulik — who believes the deal will be approved — cited in a research note the steady decline of traditional TV distributors, the accelerated push for heft and the inevitable move to direct-to-consumer services as catalysts for more deals. Subscribers to traditional pay TV providers have declined by about 50% since 2010 and dipped 14% in 2017 alone, he noted.

OTT Has Changed Everything
“OTT is clearly the future of video distribution,” Hodulik wrote, and is likely the main driver behind the mega content deal between The Walt Disney Co. and 21st Century Fox, Comcast’s unsolicited bid for British satellite TV company Sky and CBS’s moves to revisit a recombination with corporate sister Viacom.

Hodulik argued that government fears that a combined AT&T-Time Warner would limit content choices and drive up prices run counter to the OTT-inspired shift. And if AT&T isn’t allowed to purchase Time Warner, another company will.

Earlier this month, at an industry conference, CBS chief operating officer Joe Ianniello called the current environment an “arms race” to accumulate content needed to drive direct-to-consumer products.

Ianniello said CBS All Access, the broadcaster’s own OTT product, will add six to seven new shows in the next 12 months, just to compete with the likes of Netflix and other providers. “We’re doubling down,” he said.

Hodulik thinks the land rush for content is warranted. He predicted that virtual multichannel video programming distributors such as Sling TV and DirecTV now will nearly triple their subscriber bases from about 5.5 million in 2017 to 15.1 million by 2020.

Watch MCN: vMVPDs by the Numbers

At the same time, pay TV subscribers, down 3.6% in 2017 to 95.4 million customers when vMVPDs are included, are expected to dip another 4.4% in 2018 to 91.2 million, according to the analyst.

Cable Gets Into the Act
Hodulik said traditional distributors dipping their toes in the vMVPD waters — like Comcast and Charter Communications — will make the full plunge in the next few years.

Comcast introduced Instant TV in late September, a package of broadcast and education channels for $18 per month, to compete with Sling TV and DirecTV.

Charter unveiled its “Choice” package — 25 channels for $21.99 per month — earlier this year.

Mostly because of a desire not to cannibalize existing, higher margin businesses, the offerings haven’t been broadly offered. That is about to change, especially as streaming services gain scale, Hodulik believes. He said he thinks it won’t be long before their OTT offerings mirror their existing video packages.

“We believe scale benefits will eventually lead cable to offer streaming TV services out of region, likely in conjunction with a wireless offering,” he wrote.

As the earnings season rapidly approaches, analysts see a strong second quarter for cable distributors, a combination of continued momentum and benefits from the six-week strike by Verizon Communications employees in April and May.

Comcast is expected to be the first cable operator out of the earnings blocks, releasing its Q2 results on July 27.

Consolidation catalysts Charter Communications and Altice N.V. — Charter completed its acquisition of Time Warner Cable and Bright House Networks on May 18, while Altice finished its purchase of Cablevision Systems on June 21 — are both slated to release results on Aug, 9.

Actual numbers for Verizon — expected to show subscriber declines, or at least slower increases — aren’t expected until July 26, when the telco officially releases results. That hasn’t stopped some analysts from estimating the damage.

Verizon employees walked off the job on April 13 and stayed out until May 27, when a deal was struck that increased hourly wages and avoided pension cuts for nearly 46,000 unionized workers. The six-week standoff ground Fios installations to a crawl, as contractors were brought in to take up the slack.

UBS Securities telecom analyst John Hodulik predicted Verizon would lose about 33,000 Fios subscribers in Q2, compared to a gain of 26,000 customers in the year-ago period.

Verizon has experienced a steady decline in Fios TV customers over the past several three-month periods: it gained about 178,000 customers in 2015, down from 387,000 additions in 2014. But the strike apparently pushed the telco into the red in the second quarter. Hodulik expects the telco to return to positive video subscriber growth in the third and fourth quarters (about 10,000 each), but at a slower pace.

Verizon chief financial officer Fran Shammo has said in the past that total wireline customers, including non-video subscribers, could flirt with negative territory because of the strike. At a Bank of America Merrill Lynch media conference in London in June, Shammo said because most of the strikers were in installations and maintenance, Verizon was in “catch-up mode” and expected broadband additions to be negative in Q2.

Comcast is expected to continue to temper basic-video subscriber losses in Q2, shedding just 10,000 video customers compared with a loss of 69,000 subscribers in the same period in 2015.

In a note to clients, Hodulik said the results were helped by the Verizon strike as well as the transition of former Fios properties in California, Texas and Florida to Frontier Communications, which wasn’t ready to do a lot of subscriber acquisition marketing while absorbing the territories with some 1.2 million Fios customers.

Overall, Hodulik estimated cable operators would lose a collective 500,000 video subscribers in the second quarter, slightly better than a year ago.

Other analysts weren’t quite as optimistic. Morgan Stanley media analyst Ben Swinburne expects Comcast to shed about 24,000 video customers in the quarter, with Charter dropping 86,000. Analysts share an enthusiasm for improvements in the cable sector for the full year, though. Swinburne estimated Comcast and Charter will both end 2016 on a positive basic-video subscriber note, with Comcast adding 100,000 subscribers and Charter adding 58,000 customers.

“We see another strong sub quarter for cable at the expense of its telco/satellite competition,” Swinburne wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak reduced his estimates for Q2 subscriber losses at Comcast from 50,000 to 20,000, based on his belief that churn trends continue to be solid and to better reflect the effects of the Verizon strike.

“We expect a solid cable result in the seasonally weak 2Q,” he wrote.

Verizon Communications, a little more than a decade after it launched its Fios TV and Internet service, is moving quickly toward what it believes is the future of the video industry.

It’s a future that hearkens back to TV’s over-the-air origins, where consumers can get all the bandwidth and content they want with no strings attached.

Verizon appears to be banking that mobility — long a buzzword in the video business, but one that hasn’t yet made a big dent in overall viewership — will take a dominant position in the next several years.

For the past year, the New York-based telco has been on a tear to remake itself into a 5G powerhouse:

• In February of 2015, Verizon agreed to sell Fios assets in Florida, California and Texas with more than 1 million video customers to Frontier Communications for $10.4 billion, a deal that is expected to close March 31;

• Verizon bought XO Communications’s fiber network in February for $1.8 billion;

• It launched FreeBee data, a sponsored data service that allows customers to download and watch certain video content without using up their wireless data plans, in January;

• It launched Custom TV — one of the first successful “skinny” video bundles — in April of 2015, revamping the package this February;

• It launched mobile-only, ad-supported over-the-top video service go90 in October of 2015;

• It purchased online icon AOL in June of 2015 for $4.4 billion.

BIG SHIFT AHEAD

Verizon’s recent moves point to its belief that a major shift in the video business is coming, Craig Moffett, principal and senior analyst at MoffettNathanson, said.

“It seems like they’ve made a complete reconceptualization of the video business inside of Verizon and have decided if there is an opportunity in video, it’s in wireless, location-based advertising,” he said. “If they’re going to win in that business, they’re going to have to disrupt the video ecosystem. It seems to me that they have decided that any ties they have to the status quo are a liability.”

Nowhere in the product set is that more evident than with go90. Launched in October, go90 has been downloaded by about 2 million users, has according to some reports. It was ranked No. 300 among all apps on the iTunes Store and No. 20 against all entertainment apps, according to UBS Securities telecom analyst John Hodulik.

Go90 is different than the other millennial-targeted mobile services in that — for now — it is fully ad-supported, meaning Verizon isn’t charging a monthly fee for the service. Customers can watch about 8,000 on-demand titles and stream content from MTV, Comedy Central, ESPN, Food Network, Discovery Channel, AwesomenessTV and others.

Increasing the number of go90 users is a priority, but it’s not the main point of the service, Verizon chief financial officer Fran Shammo said on a January earnings call.

“The key to us is not the downloads; the key is viewership,” Shammo said. “It’s around content and we will continue to add content that is favorable to all generations of population.”

Later, at the Deutsche Bank Media, Internet & Telecom conference on March 8, Shammo said that the addition of AOL’s 350 million users could help add needed scale to the service.

“Eyeballs will be the winner at the end of the day because the more eyeballs I can get to that platform, the more advertisers that are going to come and want to advertise, and therefore I can monetize the usage,” he said.

That strategy has emerged from Verizon’s past eff orts to pay more and more for additional wireless usage — efforts that haven’t worked in part because disposable income in the U.S. hasn’t really grown since 1991, Moffett said.

“Go90 is not about trying to create a substitute for Netflix,” Moffett said. “They’re not out competing with other video services in the traditional sense; they’re trying to create advertising inventory.

“They need to get customers to spend some time looking at their phones. If they can get customers to spend time engaged with the device, they are highly confident that there is a long list of advertisers who will pay for reaching those customers.”

In a research note, Hodulik recounted a meeting with AOL CEO Tim Armstrong, saying the company estimates there is an $80 billion near-term incremental opportunity in the ad space — $40 billion from video and $40 billion from mobile. AOL held 40 meetings for go90 with advertisers during the fourth quarter, Hodulik said. It will spend 2016 building an audience for the service and expects “real traction this year.”

All this seems like a huge departure from when Verizon launched Fios as a means to tap into the lucrative TV market and preserve what at the time was a rapidly declining wireline business.

When Verizon introduced Fios in Keller, Texas, in May of 2005, it — along with AT&T’s U-verse — was supposed to be the last nail in cable’s coffin. It spent $20 billion on a massive fiber upgrade and unleashed unheard-of data speeds (up to 50 Mbps!) on a bandwidth-hungry public.

Now cable is enjoying a resurgence — Charter Communications and Time Warner Cable both had their first positive video-customer growth in nearly a decade in 2015 — and Verizon’s Fios TV has seen its growth slip.

But Verizon’s reversal of fortune doesn’t mean the Fios experiment was a failure. For many people who follow the company, Fios will remain a key component in Verizon’s new direction and will play an additional role. Verizon’s new mantra is mobility.

Lowell McAdam, Verizon’s CEO, said as much in 2014, telling an industry conference its then-recent purchase of Intel’s OnCue video service would enable it to take Fios content over-the-top and make it mobile on a nationwide basis.

The telco’s strategy is to use its existing network to deliver wired broadband and television service throughout its territory while also serving as a backhaul network for its wireless assets. Chief network officer Kyle Malady said Verizon fiber currently passes about 20 million homes, and the telco has already started trials for the next generation of wireless technology — 5G — with its promised 1 Gigabit-per-second speeds.

In the meantime, the company still sees opportunity in wireline service.

“From what you’ve seen from us, obviously there is no one answer,” Verizon spokesman Ray McConville said. “There is no ‘one-size-fits-all.’ We’ve adapted ourselves to have something for everyone.”

In some ways, Verizon is a walking contradiction. It has said it wants to grow the Fios TV business, yet it sold a huge chunk of video and broadband subscribers last year to a CLEC. In an era when rival cable companies are scrambling to accumulate greater and greater scale, Verizon appears to be taking the opposite stance.

BEEFING UP REGIONALLY

The main thrust behind the recent asset sales has been to cluster its operations in the more densely populated Northeast and Mid-Atlantic regions, Malady said. In addition to being able to target a bigger pool of homes for service, the concentration also makes its network more efficient to operate.

Both video and broadband growth have slowed. Fios TV added just 20,000 video customers in the fourth quarter, its lowest quarterly growth ever, and Fios Internet added 99,000 subscribers, down from 145,000 additions in the prior year.

Shammo said Verizon still sees growth opportunity even in its more-mature Northeastern markets. At about 5.8 million video customers at the end of 2015, Fios TV has about 35% penetration throughout its footprint. That’s about the same as Charter Communications, the cable operator that many in the industry believe has the greatest video-subscriber growth potential of any U.S. incumbent.

Shammo isn’t the only one who believes Verizon can squeeze more growth out of the wireline network.

According to Barclays telecom analyst Amir Rozwadowski, Fios TV is expected to grow to about 5.9 million customers by 2017, up 5% from 2014. At the same time, Fios broadband customers are expected to rise 18% to 7.8 million customers by 2017.

The Fios fiber network isn’t just tethered to residential TV and broadband service; it also carries data traffic between wireless cell sites. That means that Verizon will be ready when video traffic increasingly shifts to wireless, a move many pundits see coming.

According to Cisco Systems’s Visual Networking Index, mobile video traffic accounted for 55% of all mobile data traffic in 2015; by 2020, 75% of the world’s mobile data traffic will be video. That means robust backbone networks will be more important than ever.

“The next five years are projected to provide unabated mobile video adoption,” the report said. “Backhaul capacity must increase so mobile broadband, data access, and video services can effectively support consumer usage trends and keep mobile infrastructure costs in check.”

That’s where the Fios backbone network and the telco’s eff orts to make 5G wireless technology a reality come in.

“At the bandwidths they’re talking about [for 5G], the nodes are going to need to be close together, and they are going to require fiber,” Malady said.

Fiber also becomes an extremely important factor once wireless video traffic increases, as anyone who has tried to stream the season premiere of a popular show like Game of Thrones knows. Wireless streaming is only as good as the pipes behind the towers transferring the data.

“The network behind it is the key, because that’s where a lot of these things get choked at peering points,” Malady said. “It all comes down to having good fiber connections between these places to move the bits.”

But in the bandwidth business, demand eventually outpaces supply. Verizon’s purchase of the XO Communications fiber network will mainly help its enterprise business, but it will also help with wireless backhaul, particularly between smaller cell sites. It’s capacity that Malady said is more than needed in today’s environment.

5G’S FIBER FOUNDATION

“I have been around for 27 years and I haven’t seen the growth curve stop,” Malady said. “It just keeps going up and up and up, and people’s demand for bandwidth continues to grow, and that’s why we think we’re pretty well-positioned with our fiber assets, and that’s why we’re requiring more.”

Touted as the next generation of wireless, 5G still has a way to go, as standards still haven’t been created for the service. But like its predecessors before it — 4G and LTE — 5G is the next evolution in wireless technology, offering speeds 30 to 50 times faster than 4G, reduced latency and improved power efficiency. Verizon has been at the forefront of the technology, beginning field tests of the technology earlier this year and predicting a limited commercial rollout as soon as next year.

“Just like we were out ahead of the market on LTE, we’re ahead of the market on 5G,” Malady said. “By definition, at the bandwidth we’re talking about, cell sites and nodes require a lot of fiber. Fiber is a big piece of the equation.”

Shammo is equally enthused.

“We believe that 5G is near-term, not far-term, and it is going to bring a whole different dynamic to the industry,” Shammo said at the Deutsche Bank conference. “It is going to give another growth profile for this industry.”