Why ViacomCBS And Discovery Risk 'Still Skews To The Downside'

Media stocks ViacomCBS Inc. VIAC and Discovery Communications Inc DISCA bounced back on Tuesday after a sharp two-day sell-off related to the unwinding of hedge fund Archegos Capital Management. But while the stocks are certainly much cheaper than they were a week ago, one analyst said investors should think twice about buying the dip.

The Analyst: Bank of America analyst Jessica Reif Ehrlich reiterated her Underperform rating for ViacomCBS and raised her price target from $32 to $38. Ehrlich also reiterated her Underperform rating for Discovery and raised her price target from $25 to $35.

The Thesis: In her new note, Ehrlich said both ViacomCBS and Discovery are making the right move in focusing their growth efforts on the streaming model. However, the companies’ transition from traditional cable TV models to over-the-top models will be more difficult and costly than many investors realize.

“While recent streaming investments have led investors to increase focus on the longer term potential of these content assets, we believe the risk/reward still skews to the downside, even after the recent pullbacks,” she said.

She said it will be extremely difficult for both ViacomCBS and Discovery to reach the scale needed in streaming to approach the current economics of their legacy pay-TV businesses, which are likely in secular decline. For the time being, any content they add to their streaming services risks cannibalizing high-margin linear TV business, creating an extremely difficult balancing act for the two companies.

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At the same time, ViacomCBS and Discovery have fallen well behind streaming leaders Netflix, Inc. NFLX and Walt Disney Co DIS, and Ehrlich said there are legitimate questions about just how many different streaming services customers will be willing to subscribe to in the long-term.

Benzinga’s Take: It may be tempting to buy the dip in ViacomCBS and Discovery, but the two companies are facing an extremely difficult path forward in managing their pressured linear TV businesses while attempting to build streaming services to compete with Disney and Netflix. At the very least, both ViacomCBS and Discovery are extremely high-risk investments at this point, even after their recent sell-off.