Why buyers wrestle to judge media shares like ViacomCBS, Discovery

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Source: Viacom | Wikipedia

Good luck figuring out how to properly value media stocks right now – investors seem utterly confused.

A number of conflicting variables have made trading old media stocks like ViacomCBS and Discovery a game of roulette this year.

It’s not often that investors see tens of billions of dollars worth of decades-old companies that lose more than 30% in two days. It did so with ViacomCBS Tuesday and Wednesday after the company announced it plans to raise $ 3 billion from new stock offerings. The discovery lost more than 10% on Wednesday.

Both companies continued their decline on Thursday. ViacomCBS closed more than 5% and Discovery closed 6.8%.

The withdrawal comes in response to ViacomCBS’s signal to the market that the company’s management believes that equity may be overpriced. Bernstein analyst Todd Juenger said in a statement to customers on Wednesday that he agreed with this assessment.

“It is not new news that we believe ViacomCBS shares are significantly overpriced,” Juenger wrote. “We haven’t met any professional investors defending the stock’s upside as it was trading at around $ 25.”

MoffettNathanson analyst Michael Nathanson was even more blunt.

“We never thought Viacom would trade near $ 100 a share,” said Nathanson. “Obviously, ViacomCBS’s management hasn’t sold a reasonable amount of $ 3 billion worth of stocks / converters to clean up leverage and invest more in streaming.”

Since the start of the year, ViacomCBS is up 85% and Discovery is up nearly 100%. The rise in both stocks is due to a cacophony of variables, which is why investing is particularly difficult right now.

Flight to quality

Investors expect interest rates to rise soon as the US economy warms as Americans get vaccinated and return to normal life. So-called value companies with stable sales, profits, and free cash flow rise as money shifts from higher-growth technology stocks to less risky assets.

Cable companies have long been considered cash cows as Americans pay for cable month after month no matter how the economy goes. But those days are over as millions of US households cancel Pay TV for a diet with streaming services every year. ViacomCBS revenue in 2020 decreased 6.8% year over year from $ 27 billion to $ 25.2 billion. Discovery revenue declined 4% year over year to $ 10.7 billion.

While both companies may continue to be treated as “value” stocks, their big gains in 2021 are leading value investors like Charles Bobrinskoy of Ariel Investments, who they consider overheated.

“Basically, the stock went too far,” said Bobrinskoy on Wednesday of ViacomCBS. “It had gone from a triple profit to a 22-fold profit. Things are coming back to earth.”

The streaming multiple shift

The holy grail of all traditional media companies has been to capture a trade multiplier closer to Netflix’s by shifting their businesses to streaming video and away from the declining bundle of cables. Discovery and ViacomCBS did so this year, each announcing a flagship streaming service to generate new growth.

However, these streaming strategies are insufficient to explain recent inventory runs for ViacomCBS and Discovery.

Discovery has already informed investors that Discovery + exceeded 11 million subscribers in the past month – a good start. The jury is not yet sure whether Discovery + will have a broad audience.

ViacomCBS officially launched Paramount + earlier this month and has not released a subscriber update. While Paramount + has a lot of content there is still no way of knowing whether consumers are paying an additional $ 5.99 (with ads) or $ 9.99 (without ads) per month on top of all the other streaming services already available.

GameStop contagion effect

A more plausible explanation is the GameStop / Reddit effect.

ViacomCBS and Discovery were severely shortened companies as investors were skeptical of theirs about the long-term prospects of both companies in a crowded media landscape with mega-competitors like Comcast, Netflix, AT&T, Disney, Apple, and Amazon all offering streaming services own.

The contagion from the recent brief bottlenecks at GameStop and AMC Entertainment (not AMC Networks) prompted cautious investors to cover bets on ViacomCBS, Discovery and AMC Networks.

“What has changed is [ViacomCBS] assumed a net short position where there was a squeeze and not a lot of stocks were available, and then the company issued a lot of new stocks, “Bobrinskoy said briefly.”

A balancing act

Every media company is juggling how to balance declining cable bundle revenues with increasing streaming subscriptions. Without knowing exactly how many people will sign up for Paramount + and Discovery +, it is extremely difficult for investors to know how to rate either company.

ViacomCBS agreed last week to spend $ 2.1 billion annually on NFL rights, which will now be available for linear CBS and Paramount +. Calculating how much revenue the company will lose to linear cancellations versus streaming supplements is the industry’s biggest question mark.

Programmers “who appear to be giving up their linear programming duties by quickly moving premium content to their DTC platforms are at risk of being dropped by MVPDs and / or suffering lower annual price escalators, particularly as retrans grows” wrote Nathanson. with reference to multichannel video program distributors.

In English, if media companies streamed too much content too quickly on their own streaming services, pay TV providers’ revenues could fall faster than investors expected as these providers push for lower payments for less exclusive or poor quality programming.

In addition, there may be an acquisition bonus for ViacomCBS and Discovery. Each remains sub-scaled in the broader media landscape, making both companies potential targets for larger players.

With so many unknowns, even professional media investors – like the former Disney + head Kevin Mayer, who is now looking for their own media and entertainment goals through a special acquisition company – shrug their shoulders in order to understand the market.

“The market is skewed in many different ways for many different reasons,” Mayer told CNBC earlier this month. “We have to acknowledge that in every discussion we have about it.”

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

WATCH: Ariel’s Charles Bobrinskoy discusses ViacomCBS stock

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