ViacomCBS lost over 50% of its market value in a week - why?

via Giphy

In January & February there was a “dumb money”… or to put it more kindly, an “irrational exuberance” stock price run-up for the ‘mini streamers’ (ie. folks who are not DISNEY, NETFLIX or AT&T/HBO) as PARAMOUNT+ and DISCOVERY+ launched. The LA TIMES just did an analysis on the media stock boom about 2 weeks ago. Case in point, here is DISCOVERY’s 5 year stock history… as of market close on Friday (we’ll get to that huge drop on the end in a moment):

Peripherally AMC Networks also reported subscriber gains for their small streaming empire back in February (AMC+, SHUDDER, etc) and was grouped into this stock run-up as well, gaining about 75% in 2021 at its peak. Although - totally possible part the AMC NETWORKS stock price bump was from people mistaking it for AMC THEATERS. Yeah the stock market is in that kinda phase.

STARZ’s parent company LIONSGATE also had a healthy 2021 start, almost 2X’ing their share price in 2-3 months based on STARZ streaming business growth.

A good portion of this “exuberance” was likely from the so called Robinhood investors (younger, generally newer investors using Robinhood as their trading app of choice. Also pretty much the people behind the rise of the term “stimmy”). These are the folks who have been behind things like the GAME STOP phenomenon, who also have been putting all streaming data info above any other financial or business realities for media companies.

As a result, VIACOM’s stock was on its way to cross $100/share - it’s previous 5 year high was about $68/share. So they decided to take advantage of this opportunity and issued a bunch of new VIAC shares at this inflated price in mid-March, as a way to raise big $$ (approx $3 Billion) to support the huge impending PARAMOUNT+ costs.

• PROBLEM 1: When you issue more shares of your company… it dilutes the value of the shares people currently hold because there are more of them out there. Wall Street hates that. A lot.

• PROBLEM 2: A bunch of people saw the EKG like visual on these stocks and were already shorting them (betting on it to fail), which can cause a steeper fall when said fall does begin.

• PROBLEM 2.5: Apparently a huge fund had to sell a large chunk of VIAC stock last week to cover other losses.

And thus - an absolutely punishing week for VIACOM as a result.

DISCOVERY was tied up in the “mini-streaming service” stock rise of Jan/Feb as they also launched their streaming service DISCOVERY+ in January; so when VIAC plummeted… so did DISC. Especially as more people came around to the realization that 7 million US DISCOVERY+ subscribers… paying $5/month isn’t exactly “changing the game”. Thus, DISCOVERY lost about 45% of its market value in 5 days.

DISCOVERY also faces the same long-term core business challenges as VIACOM (and AMC NETWORKS to an extent), whether the Robinhood crowd wants to acknowledge them or not. Every quarter the cable business sheds hundreds of thousands of customers… which also takes money out of DISCOVERY, AMC & VIACOM’s pockets, since they get payments from cable companies each month based on the the number of cable customers that have their cable networks.

Fewer cable customers = less $$ coming in from cable companies. AND, it means fewer households for DISCOVERY, AMC & VIACOM to advertise to…. which also means lower ad revenue overall.

So VIAC was down over 50% last week, and DISC down 45%; AMC NETWORKS only took about a 21% hit since it wasn’t as inflated to begin with, and STARZ is not affected as much at all by these factors as a PayTV service, so the LIONSGATE stock drop was also more in the 20 percent range.

WHAT’S NEXT: Predicting stock price is a fool’s errand. See the above disaster. Although chances are, the stock price collapse has bottomed out for the most part on this sector.

VIACOM also likely had to have calculated a stock price hit of some sort when making that choice to take advantage of the inflated stock price to issue more shares. Although one has to believe they didn’t think it would be this bad.

However looking ahead, ultimately what this means is that there’s now A LOT more riding on the 1st Quarter earnings calls of VIACOM, DISCOVERY and AMC NETWORKS in about 4-6 weeks, where they report their next round of subscriber numbers for their streaming services, and projections for the rest of 2021.

FINAL ANECDOTE: I signed up for the free 30 day trial of PARAMOUNT+ on launch day March 4th, which is now about to expire. I went to cancel my subscription last night so I don’t get charged on April 5th (I’ve used PARAMOUNT+ twice in a month). But they then offered me the next 2 months at 50% off (and yah, I took the deal). So when VIACOM reports PARAMOUNT+ subscriber numbers in May…. it’ll be interesting to see if VIACOM also reports how many of those subscribers are actually paying for it, and how much.

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Thanks for taking a read! Sean