ViacomCBS peaked at a 160% increase year-to-date, which Wells Fargo says marks the end of a volatile period. The firm believes that valuations are resetting to more "normalized levels."
"Now times are changing and we're changing with the times. While we don't think these media stocks will go back to their historical low levels due to more DTC optimism + the potential for an enduring nonfundamental premium, we do see gravity pulling the multiples closer to prior norms," analyst Steven Cahall wrote.
ViacomCBS was downgraded to underweight from equal weight with a $59 price target, down from its previous $82 per share target. Viacom shares were falling 14.2% to $56.91 Friday.
Meanwhile, Discovery was downgraded to equal weight from overweight and its price target was lowered to $59 per share from $65 per share. Discovery shares were down 21.9% to $45.13 Friday.
Despite the downgrade, Wells Fargo remains bullish on "the prospects for Discovery+ after a strong start to the year + pending international expansion with the Olympics. We like the fact that Discovery+ is a primarily incremental strategy and value it a premium on subs to peers," Cahill said.
"We also think DISCA has less core risk due to no licensing, set affiliate price increases, more international exposure and a bit more recovery momentum due to relative ad exposure," Cahill added
This is the second Discovery downgrade this week after UBS previously downgraded the stock to sell.