CuriosityStream Stock Tanks on Double Downgrade

Shares of CuriosityStream (NASDAQ: CURI) tanked on Friday after getting a double downgrade from Wall Street. BofA Securities cut its rating on CuriosityStream stock by two notches from buy to underperform, while maintaining its price target of $14.

As of 1 p.m. EDT, the stock was down by 13%.

Hitting the price target ahead of schedule

To be clear, BofA does not believe that CuriosityStream’s long-term opportunities have changed much. Rather, the rating change is attributable in large part to accommodating recent price action. After bottoming out around $8 last month, CuriosityStream shares had roared back to approach $16 last week, nearly doubling in a matter of weeks and hitting BofA’s $14 price target in the process.

Importantly, much of that rally was not driven by fundamental events. CuriosityStream popped earlier this month after it was named a preliminary addition to the Russell 3000 Index, one of the most prominent small cap indexes. 

As previously noted, stocks often jump on index inclusion since various index investment funds that track the underlying index are obligated to purchase shares. The more widely-followed the index, the more pronounced the effect. Getting added to an index conveys a sense of credibility but does not impact business fundamentals.

Highlighting the risks

Following the rally, BofA Securities believes the risk/reward profile for CuriosityStream has shifted. While the investment bank is confident because 90% of its full-year revenue guidance is already under contract, the educational content streaming company still faces a handful of risks going forward.

Visibility regarding future revenue trends is limited, especially as it relates to sponsorship deals or licensing agreements. CuriosityStream, which completed its merger with a special purpose acquisition company (SPAC) in late 2020, is also investing heavily in its business in an effort to drive revenue growth, but that could pinch profitability. The company remains very young and has underperformed analyst expectations for EBITDA for several quarters, calling into question its ability to deliver financial results.

The video streaming industry saw demand surge during the COVID-19 pandemic when consumers needed home entertainment options. With the crisis subsiding within the United States thanks to vaccines, that may create tough comparisons to last year and direct-to-consumer (DTC) churn could potentially increase.

At the same time, larger entertainment behemoths are plowing money into content and consolidating: Amazon.com (NASDAQ: AMZN) is buying MGM Studios, and AT&T (NYSE: T) is spinning off WarnerMedia and merging the iconic content creator with Discovery (NASDAQ: DISCA). While those moves may lead to intensifying competition, BofA Securities also points out that more consolidation could potentially make CuriosityStream an “attractive acquisition candidate.” 

CuriosityStream’s guidance for 2021 calls for revenue of at least $71 million, representing 80% growth. The company finished the first quarter with 16 million total paying subscribers.

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