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Discovery, ViacomCBS victims of streaming exuberance in shady-money sell-off

For months, investor enthusiasm around the new streaming services from Discovery Inc. and ViacomCBS Inc. seemed too good to be true. And in fact, some of it was.

Like many major media companies, Discovery and ViacomCBS recently launched shiny new streaming services. Direct-to-consumer platforms have found plenty of investment interest both on a secular shift out of traditional video and pandemic-era cyclical trends as consumers stuck at home increased their digital video engagement.

Launching and retooling their own direct-to-consumer strategies through the pandemic, Discovery announced its U.S. streaming platform discovery+ on Dec. 2, 2020, and ViacomCBS announced its Paramount+ platform on Sept. 15, 2020. Paramount+ would roll up and expand on its existing CBS All Access platform. Both companies enjoyed a run-up of investor enthusiasm on the strength of those announcements, particularly in the last quarter of 2020 and into the first weeks of 2021. Between Oct. 1, 2020, and March 20, Discovery and ViacomCBS shares catapulted 188.6% and 142.4%, respectively.

But just how much enthusiasm was merited is the topic of ongoing debate.

Both companies saw revenue decline sharply through the pandemic as advertising revenue fell and consumers increasingly favored streaming over traditional television networks. Both companies saw revenue return to pre-pandemic levels in the fourth quarter of 2020, but they improved year over year by just 3.3% for Viacom and 0.4% for Discovery. Where Viacom reported healthy net income in the fourth quarter against negative net income in the 2019 fourth quarter, Discovery reported a 37.8% decline in net income for the 2020 period over the 2019 period.

But while the financial metrics stuttered amid the pandemic, subscriber forecasts for the companies' respective streaming services popped.

ViacomCBS with its Feb. 24 earnings release said it is expecting up to 75 million Paramount+ subscribers by the end of 2024. The company said global streaming subscribers across its platforms approached 30 million, up 56% year over year. In the U.S., subscribers climbed 71% year over year to 19.2 million.

Discovery on Feb. 22 said its direct-to-consumer subscribers had reached 11 million, on its way to 12 million by the end of that month, after launching Jan. 4. The company's investments in the platform contributed to its declines in profitability, which will persist through 2021, and those will accompany a decline in advertising revenues as the company prioritizes the discovery+ platform over its traditional ad-based TV networks.

While the streaming services were assumed to be driving much of the share movement Discovery and ViacomCBS were seeing, it turns out that a major "family fund," Archegos Capital Management LLC, had been building massive leveraged stakes in each company through derivatives with some of the largest banks. At the end of March, margin calls against its stakes in ViacomCBS and Discovery drove the collapse of Archegos, as well as double-digit declines in ViacomCBS and Discovery shares. Archegos was operated by disgraced Tiger Asia Management executive Bill Hwang.

By registering Archegos as a family fund, Hwang was able to avoid many of the disclosures and regulations that apply to financial advisers, hedge funds and private equity funds. The publicizing of the shady Archegos fund has raised questions about the ability to cloak such large and highly levered investments under the family-fund registration and through bank derivatives. There could easily be other massive, undisclosed holdings that face similar risk and could lead to similar market upheaval, market observers contend.

The analyst downgrades that helped prompt the Archegos margin call were a response to runups in each company's stock price. Where analysts applauded the priority on streaming strategies for ViacomCBS and Discovery, in the face of subscriber numbers posted by competitors such as The Walt Disney Co. and Netflix Inc., the exuberance for the two smaller studios struck some analysts as overbaked.

"We have been continually asked if we think ViacomCBS will be able to make the necessary pivot to a growth company. While the market may be saying yes as the stock keeps climbing higher in recent months, we think the answer is no," MoffettNathanson equity analyst Robert Fishman said in a March 11 note on ViacomCBS titled "Climbing a Mountain of Worries."

In that note, Fishman did raise his price target for the company by $17 to $67. He had positive things to say about ViacomCBS's Paramount+ strategy and the library's ability to compete in an increasingly crowded streaming ecosystem. But he was unable to justify the stock's $82.89 closing price the day prior to publishing the note or its cresting $100, which it did less than two weeks later.

The downgrades and collapse of Archegos tracked as a 54.1% decline for ViacomCBS shares since March 19 and a 43.6% drop for Discovery, but it did not completely wipe out market capital accrued by those network operators through the pandemic. Between March 31, 2020, and March 30, 2021, ViacomCBS shares were up more than 232%, and Discovery shares were up more than 123%.

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