Please ensure Javascript is enabled for purposes of website accessibility

Why Discovery Communications Stock Plunged Today

By Jeremy Bowman - Mar 26, 2021 at 2:56PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the media company continued to give back gains following a monster run-up.

What happened

Shares of Discovery Communications (DISCA) (DISCK) were sinking again today. Investors continued to bail out of suddenly popular legacy media stocks like Discovery and ViacomCBS (PARA 1.30%), which have recently launched streaming services.

There was no particular news out on Discovery, but trading was so volatile that it was temporarily halted this morning. However, Discovery said that the volatility was not the result of insider transactions or trading.

As of 1:40 p.m. EDT, Discovery Series A shares were down 27%, while Series C shares had fallen 30.9%. Meanwhile, ViacomCBS stock was down by a similar percentage.

A person holding a remote at a streaming TV.

Image source: Getty Images.

So what

Trading volume on Discovery stock was extraordinarily high today, approaching 50 million shares before 2 p.m. EDT. This indicates that an institutional investor may have decided to sell some of its stake in the media company.

ViacomCBS shares fell, in part because of a downgrade from Wells Fargo, which lowered its rating on the Paramount+ owner to underweight. Wells Fargo said that after a recent equity raise, momentum in the stock seemed to be fading and its valuation would move back to a more normalized level.

As the chart below shows, Discovery has moved almost perfectly in tandem with ViacomCBS as excitement about the companies' new streaming services fueled a bullish narrative. However, those gains are quickly disappearing as investors seem to realize that streaming services alone don't justify a tripling of the share price in just a few months.

VIAC Chart

VIAC data by YCharts.

Now what

The last year has seen the floodgates open in streaming, with services like Disney+, Apple TV+, Peacock, HBOMax, Discovery+, and Paramount+ either launching or ramping up significantly. In its Feb. 22 earnings report, Discovery said it had signed up 11 million subscribers to Discovery+, which launched on Jan. 4, and expected to end the month with 12 million.

However, the economics of streaming require significant scale to turn a profit, as Disney's streaming division is still not profitable, even with more than 100 million subscribers. Legacy media companies are essentially disrupting themselves here, hastening cord-cutting to build a streaming service. 

While Discovery should be rewarded for the strong early results from Discovery+, the correction is justified because the value of the company hasn't tripled in just a few months.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISCK
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$41.67 (-0.79%) $0.33
Paramount Global Stock Quote
Paramount Global
PARA
$32.64 (1.30%) $0.42
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISCA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.