Shares in Curiosity Stream (NASDAQ: CURI) gave way on Friday after receiving a double downgrade from Wall Street. BofA Securities has lowered the rating of the CuriosityStream share by two notches from “Buy” to “Underperform” while maintaining the price target of USD 14.
As of 1:00 p.m. EDT, the stock lost 13%.
Reach target early
To be clear, the BofA doesn’t think CuriosityStream’s long-term opportunities have changed much. Rather, the rating change is largely due to the adjustment of recent price movements. After bottoming out at around $ 8 last month, CuriosityStream stock climbed back to $ 16 last week, nearly doubling in just a few weeks, hitting BofA’s target price of $ 14 .
What is important is that much of this rally was not driven by fundamental events. CuriosityStream surfaced earlier this month after being a tentative addition to the Russell 3000 index, one of the most famous small-cap indices.
As mentioned earlier, stocks often jump on index inclusion as various index funds that track the underlying index are required to buy stocks. The more closely the index is tracked, the more pronounced the effect. Inclusion in an index gives a sense of credibility but does not affect the fundamentals of the business.
Identify the risks
After the rally, BofA Securities believes the risk / reward profile for CuriosityStream has shifted. While the investment bank is confident that 90% of its full-year revenue forecast is already under contract, the educational content streaming company still faces a handful of risks going forward.
The visibility of future sales trends is limited, especially in relation to sponsorship deals or license agreements. CuriosityStream, which completed its merger with a special purpose vehicle (SPAC) in late 2020, is also investing heavily in its business to drive revenue growth, but that could hurt profitability. The company is still very young and has lagged behind analyst expectations for EBITDA for several quarters, which calls into question its ability to deliver financial results.
The video streaming industry saw a surge in demand during the COVID-19 pandemic as consumers needed home entertainment options. As the crisis in the United States subsides thanks to vaccines, it could make hard comparisons to last year and direct-to-consumer (DTC) churn could potentially increase.
At the same time, major entertainment giants are investing money in content and consolidating: Amazon.com (NASDAQ: AMZN) buys MGM Studios and AT&T (NYSE: T) is spinning off WarnerMedia and merging the iconic content creator discovery (NASDAQ: DISCA). While these moves may intensify competition, BofA Securities also suggests that further consolidation could potentially make CuriosityStream an “attractive takeover candidate.”
CuriosityStream’s forecast for 2021 is revenue of at least $ 71 million, representing a growth of 80%. The company ended the first quarter with a total of 16 million paying subscribers.
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