Discovery and ViacomCBS shares dipped about 3% in early trading Tuesday after Barclays Research media analyst Kannan Venkateshwar lowered his ratings on the stocks to “Underweight,” claiming the expected gains from the companies’ streaming endeavors are already baked into the share price.
ViacomCBS shares were down as much as 4.3% ($1.95 each) to $43.34 per share in early trading Jan. 19, while Discovery dipped about 2.9% ($1.07 cents each) to $35.69 earlier in the day. The stocks began to rise slightly as the morning progressed -- Discovery finished the day at $36.15 per share, down 1.7% (61 cents), while ViacomCBS closed at $43.75, down 3.4%, or $1.55 each.
Discovery launched its much-anticipated Discovery Plus streaming product on Jan. 4, and ViacomCBS said it would debut its latest online endeavor-- Paramount Plus -- on March 4. Both stocks have risen substantially over the past three months -- Discovery shares were up 76% prior to Tuesday and ViacomCBS was up 66%. In a research note. Venkateshwar said any expected gains from the new products have already been realized.
Venkateshwar attributed the earlier gains to better near-term visibility regarding fundamentals, events like Discovery’s recent Investor Day and changing investor perspectives regarding the success of the growing number of streaming services.
“However, we believe these catalysts are more than adequately priced in at present levels,” Venkateshwar wrote.
The analyst continued that both stocks are trading around 6% of their unlevered free cash flow yields and are trading at multi-year highs on 1-year forward EV / EBITDA while some financial estimates have been lowered. He noted that 2021 free cash flow estimates have come down 10% for Discovery and by 18% at ViacomCBS.
“While we understand the optimism around streaming, neither Discovery Plus nor Paramount Plus is a new product and have been available for many years under different brands, with limited success,” Venkateshwar wrote.
He added that while Disney Plus is not likely to erode its parent’s linear subscriber base, that may not be the case for smaller programmers like Discovery and ViacomCBS.
“We believe that as legacy media companies rely more on ISPs for distribution, these data service providers will be more incentivized to drop legacy bundles in favor of streaming bundles due to more accretive economics,” Venkateshwar wrote. “In addition, we believe streaming distribution models presently being tried are not static and are likely to put subscale services at a disadvantage post their promotional periods. This is why this could be the last year that media companies can try and change the streaming narrative, given declining cash flows, especially in the case of ViacomCBS. Lastly, even if we assume significant acceleration in growth in the coming five years for both services and use Netflix’s multiple to value streaming at Discovery and ViacomCBS, there isn’t much upside vs present stock levels. Therefore, we find the optimism around some of these streaming launches like Discovery Plus to be premature.”
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