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.
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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.
