What Matters Most For Viacom?

Viacom‘s (NASDAQ:VIA), stock price has declined by more than 30% over the past  year due to concerns around its future growth. Our price estimate for the company is around 40% higher than the current market price. We estimate TV channels to account for nearly 90% of Viacom’s valuation and stronger distribution pacts in this market similar to that entered with AT&T will be a key driver for Viacom’s growth in future. With growing digital media and consumption of videos on handheld devices, Viacom’s strategy around digital content will drive growth in future. While the company is at early stages of its retailing experience, we feel that if that the company is able to create a Disney store like experience for its brand Nickelodeon, this could be a potential area for growth in the long run.

Stronger Distribution Pacts

Concerns around pay TV distributors dropping Viacom’s programming to reduce bundle costs have been impacting the company’s stock price for a while, given that the company’s programming has been struggling with lower ratings and advertisers are favouring digital media to television. In October 2015, Viacom entered into a multi-year agreement with AT&T for the media giant to continue providing programming to AT&T’s U-verse TV and Direct TV U.S. subscribers. This was a very positive development for Viacom given that in 2014 60 local cable operators covering around 2 million subscribers (around 2% of U.S. pay TV households) had dropped Viacom’s channels.  We believe that pacts similar to that signed with AT&T will be key for Viacom’s valuation in future to ensure that its subscription revenues remain intact.

Digital Content

Alternative streaming platforms are increasingly becoming popular, especially in the kids content space where Viacom’s operates its cable network Nickelodeon. Online streaming platforms such as You Tube and Netflix are gaining viewership primarily due to ease of watching videos on handheld devices and anytime availability of high quality content on these platforms.  Advertisers are now shifting ad spends to mobile platforms and reducing budgets on TV ads. Viacom is trying to cash on this trend by developing kids content for mobile viewing, launching video games along with content and creating interactive videos. Nickelodeon plans to launch an animated series “Pinky Malinky” in 2016 which will be available on its digital platform. Given the current shift towards mobile viewing on online digital platforms, we believe this will be a key driver for Viacom’s growth in future.

Consumer Products

We estimate the consumer products division to contribute less than 10% towards Viacom’s valuation. However the company can leverage the popularity of its Nickelodeon brand in the form of retail products.  While we value Viacom’s consumer products segment at $3 billion, Disney’s consumer product business is valued at nearly $25 billion. This shows the tremendous potential for growth in this space, given that Viacom is at an early stage of retailing. The revenues in this segment have grown at average rate of 5% since 2010 and we expect a similar growth rate in future.  However, these revenues can grow at a much faster pace if the company is successful in its retail venture.

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