UBS Analysts Dunk on ViacomCBS, Discovery

Shares of ViacomCBS Inc. (NASDAQ: VIAC) had soared by about 170% from January 2 to March 22. Over the past two trading sessions, shares have dropped about 30%, from just over $100 at Monday’s close to around $68 Thursday morning.

ViacomCBS isn’t the only casualty. Shares of Discovery Inc. (NASDAQ: DISCA) had posted a year-to-date gain of around 157% as of last Friday (just over $77.00) before closing at about $62.00 on Wednesday and trading down at around $60.50 Thursday morning.

Viacom’s announcement of a $3 billion secondary offering of new equity securities sent the shares down by about 30% between Monday’s and Wednesday’s close. Like many other high-flying stocks (think Tesla, Nio, Apple, Netflix), Viacom tried to take advantage of the huge increase in valuation to raise cash. The company priced the offer Wednesday morning at $85 a share, after shares closed at $91.25 on Tuesday.

Viacom’s equity offering only exacerbated a weakening in the media and entertainment industry. Industry analyst John Hodulik of UBS had a research note out Thursday morning on the future of affiliate negotiations in a direct-to-consumer (DTC), or streaming, world. In a nutshell, negotiations between distributors (cable and satellite companies) and networks ” should become more difficult as the best programming is offered directly to consumers.”

Networks like ViacomCBS and Discovery now have added leverage on distributors because they can threaten to simply bypass distributors and go DTC. The networks want higher prices from distributors and can get them because the networks can go directly to customers who are willing to pay more for just CBS or NBC or ESPN without the shopping channels and all the other programming that comes with a pay-TV subscription

The short version of UBS’s story is that the new will drive out the old. Hodulik writes:

In the event of a black-out, there could be less pressure to get networks back on air as consumers increasingly have access to the same programming over the top. Broadcast and sports are receiving the lion’s share of rate increases at renewal, which in turn is driving lower, albeit still positive, price resets and escalators for cable networks. … As more investment is repurposed away from linear, this could drive a vicious cycle of fewer subs on traditional amid better content on DTC.

In a separate research note published Thursday, Hodulik maintained its Sell rating on ViacomCBS shares but raised its price target from $29 to $49 to reflect rising retail investment in the company, expected declines in content licensing beginning next year and long-term payment trends in pay TV.

According to the UBS model for ViacomCBS, Hodulik’s team estimates that streaming will account for about 16% of total 2021 revenue and grow at a compound annual growth rate (CAGR) of more than 15% through 2025, which will drive streaming’s share of revenue to more than 25% of company revenues.

Newly introduced Paramount+ plays a big role in the growth of streaming revenue. UBS believes that the streaming service will see strong growth in the first half of this year. In the U.S. market, UBS expects Paramount+ to reach 20% of households over the next five years, up from around 9% currently.

UBS has raised its EV-to-EBITDA multiple from 6.5 times to 8.5 times and lowered its free cash flow-to-share price multiple from 3.23 times to 2.91 times. The $49 per share price target represents a  26.5% potential downside to a recent price of $66.70. The 52-week price range is $11.92 to $101.97.

On Tuesday, UBS downgraded Discovery stock to Sell while boosting the price target from $24 to $46, saying that at current price levels, “the risk-reward has become more challenging.”

UBS does not see the same strength in Discovery’s new streaming service that it sees in Paramount+: “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 and his team note that the firm’s estimate implies a valuation of Discovery’s DTC business of 20 times estimated 2023 revenue, much higher than the historical range of six to 10 times for Netflix.

The analysts also note that the network’s content is “largely unencumbered by licensing deals” and that the discovery+ app is the fifth most downloaded streaming app (behind Netflix, Disney+, Hulu and HBO Max). UBS expects discovery+ U.S. subscribers to number 8 million by the end of this year and global subscribers to total 23 million.

At the new UBS price target of $46, the shares have a potential downside of around 23% to a recent price of $59.60. The stock’s 52-week range is $17.69 to $78.14.

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