Discovery’s stock price plunged Monday after CEO David Zaslav told the UBS Global Media and Communications investment conference that fourth-quarter advertising revenue will be lower than expected.
After shares fell $2.52 to $28.20, or 8.20% one analyst asked if Wall Street had over-reacted to the news.
In a report entitled “Is $8m of Revenue Worth $1.85b of Value?," Douglas Mitchelson of Credit Suisse noted that many analysts and investors had been buying the bull case for Discovery, which pointed to improved ad rates kicking in after the acquisition of Scripps Networks Interactive earlier this year, plus gains in distribution revenue thanks to Discovery Networks being recently added to Hulu and Sling TV.
Zaslav’s comment threw cold water on the first part of that thesis.
“On the advertising side, we had said that we would be 3% to 5%, and I think we're going to be a little less than that,” he told the conference.
“We hit some issues with Discovery. Discovery ratings have been down...some of it has to do with the fact that we had some production issues with Fast N' Loud. And so a show that was supposed to come back on Monday night and carry our Monday night won't be coming back until early next year.”
Zaslav said fourth quarter ad revenue will probably be in the 2% or 3% because the company’s networks are picking up new viewers among Hulu and Sling subscribers and because of a new show, Border Live.
Mitchelson said he was lowering his fourth quarter ad revenue estimate for Discovery by $8 million to $2.82 billion, but was leaving his earning number unchanged for the fourth quarter 2018 and 2019. But he still rates Discovery stock at "Outperform."
“Following discussions with senior management today, we believe our thesis around accelerating U.S. revenue growth in 2019 remains intact. Delivering the balance sheet is continuing rapidly, and we see scope for meaningful 2019 stock buybacks, while also being able to invest in IP/digital,” he said. "We see Discovery’s valuation as unusually attractive.”