After almost 3.3x rise since its March lows of 2020, at the current price of $36 per share, we believe ViacomCBS stock (NASDAQ: VIAC) is overvalued. VIAC stock has increased from $11 to $36 off its recent bottom, much more than the S&P 500 which increased about 60% from its March lows. The stock outperformed the broader market because of the strong performance of its streaming business during the pandemic and stimulus measures announced by the Fed. Though the stock is still about 15% lower YTD, we believe the market has been over enthusiastic over recent months. Despite streaming performing well, the company’s traditional businesses – theatrical, advertising, etc. – are still down and will take some time to pick up. The recent spike in Covid-positive cases will likely delay revival in these traditional segments, with revenue and earnings growth expected to be slower than earlier projections. This is likely to lead to VIAC stock dropping almost 20% from its current level. Our dashboard Buy Or Sell ViacomCBS Stock has the key numbers behind our thinking.
The company’s stock decline between 20017 and 2019 is justified by over a 50% drop in the company’s P/E multiple from over 16x in 2017 to 8x in 2019. On the contrary, during these two years the total revenue went up by 4.8% due to higher advertising and content licensing revenue. Additionally, the net income margin shot up by 36% during these two years, from 8.7% to 11.9%. Despite such a sharp rise in earnings, the P/E multiple declined from 2017 to 2019, as higher margin was mainly due to a tax benefit received. Excluding the tax benefit and other non-operating items, ViacomCBS’ operating profit margin declined from 20% in 2017 to 15% in 2019 due to higher operating cost and merger-related expenses, thus leading to a slide in the P/E multiple.
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The P/E multiple dropped further in 2020 to almost 3x, but has recovered over recent months following the gradual lifting of lockdowns. The multiple currently stands at 7x and is likely to drop further to less than 6x in the near term, driving the stock price down.
Where Is The Stock Headed?
The global spread of coronavirus led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to lockdown in almost all major cities over the globe, major movie releases and film shooting has been halted, which is not good news for a traditional media giant like ViacomCBS. The company’s key revenue sources – movie theaters, film openings, and live sports events from the CBS network – had come to a virtual halt due to the pandemic. Additionally, the cord-cutting has led to a drop in TV advertising demand, affecting revenue projections. This was reflected in the Q2 and Q3 2020 results of the company where ViacomCBS revenues dropped 12% and 9%, respectively.
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. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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 billion in FY2021, but it is still expected to remain below its 2019 level of $27.8 billion. Margin is likely to rise to a little over 10% in 2021 but would remain below its pre-Covid levels. In addition to subdued earnings, the P/E multiple is expected to drop from 7x currently to about 6x, which will in turn drive the stock down. We believe the market has been exuberant about VIAC stock, which is currently overvalued and is likely to see almost a 20% drop in its value, to settle at around $30 in the near-term.
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