Despite Impressive Streaming Growth, ViacomCBS Remains A Tricky Bet

ViacomCBS stock (NASDAQ: VIAC) lost more than 73% of its value – dropping from $42 in January 2020 to $11 in March 2020. This was due to the Covid-19 outbreak and the resultant lockdown, which led to expectations of economic slowdown, and affected the company’s traditional business segments like cable and theater. However, the multi-billion-dollar Fed stimulus provided a floor to the stock price as it rebounded from April onward and currently stands at $26 per share. With the stock still 38% below its level at the beginning of 2020, is the market too conservative or is the price rise warranted? We, in fact, believe that the stock price has risen slightly beyond its near-term potential and will likely decline marginally from here.

Where Is ViacomCBS’ Stock Headed In Next Few Months?

Trefis estimates ViacomCBS’ valuation to be around $25 per share, reflecting a slight decline of a little less than 5% from its current level. The trigger is the recent surge in Covid positive cases in the US and uncertainty with respect to the pace of lifting of lockdowns, and the fear of re-imposition of another lock down, in which case the recovery of the company’s top and bottom line will be slower than what was earlier expected. Even as per the current estimates, the company’s total revenues are not expected to reach its 2019 levels even in the year 2021. The decrease in the revenue projection is mainly due to the ongoing pandemic, leading to a complete halt in film releases and cancellation/postponement of major sporting and entertainment events hitting the company’s revenue from theatrical releases and advertising.

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This was evident from the recently released Q2 results of the company where the impact of the pandemic was palpable. ViacomCBS’ revenues decreased by 12% y-o-y to $6.275 billion in Q2 2020. This decline was mainly driven by advertising revenue which fell 27% while theatrical revenue was almost nil. The only saving grace for the company was the performance of its streaming business which recorded healthy growth. Q2 2020 saw a 61% increase in Pluto TV’s subscribers while the subscriber base of other streaming platforms (CBS Access and Showtime) increased by a whopping 74% y-o-y. This led to a digital video/streaming revenue increase of roughly 25% y-o-y, led by 52% growth in streaming subscription revenue and robust growth in Pluto TV advertising revenue. But the hit to its traditional business pulled the company’s total revenue down. Additionally, profitability also deteriorated during the quarter, with the net income margin coming in at 7.7% in Q2 2020 compared to 13.7% in Q2 2019.

ViacomCBS experienced meaningful slowdown in its advertising and theater business. Though recently there have been signs of reopening of the economy and lifting of lockdowns which led to a surge in the stock price, film production and theatrical releases will still take some more time to get back on track. Also, the recent surge in Covid positive cases in the US could prove to be an impediment in the path of the company’s healthy growth, as re-imposition of lockdowns will lead to a further decrease in the revenue growth outlook. Though the company is focusing on streaming, another Covid wave and lockdown could put its primary businesses at a meaningful risk.

For the full year 2020, total revenue is expected to be close to $26 billion and the margins are expected to drop to around 9%. Once lockdowns are lifted, revenue is expected to rise to around $27.5 billion in FY2021, but it is still expected to remain below its 2019 level of $27.8 billion. Margin could rise to a little over 10% in 2021 but would remain below its pre-Covid levels. With shares remaining stable, earnings per share (EPS) is expected to drop more than 15% by 2021. Despite a fall in earnings, the P/E multiple is unlikely to fall. In fact, the multiple could increase by close to 10% from its current level of 5x to around 5.5x. This is likely to be the effect of the company’s renewed strategy to focus on its streaming business and with the vertical reporting an impressive performance, which is proving to be the buffer during the current crisis. EPS of around $4.50 and P/S multiple of close to 5.5x in 2021 suggests that ViacomCBS stock’s fair value works to $25. Projection of lower revenue and earnings and the expectation of a turnaround in top and bottom lines taking longer than earlier anticipated, could provide a potential downside of around 5% from its current level.

So, ViacomCBS might see a decline from the current level. But, want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

For further perspective of the streaming world, see how Disney compares with Netflix.


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