After rising more than 270% from its March 2020 lows, at the current price of $41 per share, we believe ViacomCBS stock (NASDAQ: VIAC) is a good investment opportunity. VIAC stock has increased from $11 to $41 off its 2020 bottom, much more than the S&P 500 which increased about 90% 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. Also, VIAC has also made considerable progress in its cable business by renewing contracts with 13 local TV affiliates from Sinclair Broadcasting. Additionally, improvement in overall market sentiment following the successful vaccine rollout has led to expectations of revival in VIAC’s traditional business segments. If there is re-imposition of lockdowns after the recent spike in Covid cases, then that could prove to be an impediment in ViacomCBS’ growth. But in the absence of lockdowns, the stock is likely to rise from here considering a continued focus on streaming business, renewal of contracts, and expected recovery in traditional business over the coming quarters. Despite the stock being 270% above its March 2020 level, we believe VIAC stock is likely to rise almost 20% from here to reach $48 in the near term. Our dashboard Buy Or Sell ViacomCBS Stock has the key numbers behind our thinking.
The company’s stock decline between 2017 and 2020 is justified by over a 60% drop in the company’s P/E multiple from 21x in 2017 to 7x in 2020. On the contrary, during these three years the total revenue went up by 111% due to the merger between Viacom and CBS, higher advertising, and content licensing revenue. Additionally, the net income margin shot up by 24% from 9.6% to 11.9%. Despite such a sharp rise in earnings, the P/E multiple declined from 2017 to 2020, 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 16% in 2020 due to higher operating cost and merger-related expenses, thus leading to a slide in the P/E multiple.
The P/E multiple had dropped to as low as 3x in 2020 amidst the pandemic, but has recovered over recent months following the gradual lifting of lockdowns. The multiple currently stands close to 8x and is likely to rise further to more than 11x in the near term, driving the stock price up.
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 2020 results of the company where ViacomCBS revenues dropped more than 6% y-o-y.
The lifting of lockdowns over recent months have led to expectations of revival in the company’s traditional business segments. Additionally, the company’s focus on expanding streaming when demand is high is a huge positive for VIAC. Paramount+ was launched in March 2021, which includes 30,000 TV episodes, 2,500 movies, 1,000 live sporting events, and live news. Paramount+ will add properties from the combined ViacomCBS network, including Paramount, Nickelodeon, MTV, BET, and Comedy Central. Not to forget, along with Paramount+, ViacomCBS also owns Pluto TV streaming service and the Showtime network.
The recent surge in Covid-positive cases is a hiccup for a media giant like ViacomCBS. The rise in VIAC stock will be halted in case of another lockdown similar to 2020. However, that scenario looks unlikely at the moment. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. 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 Israel. As the investors’ focus has shifted to 2021 and 2022 numbers, we believe ViacomCBS will be able to add more than $3 billion in revenues in the next two years while margins will likely remain volatile. Improvement in earnings and a higher P/E multiple will drive the stock higher. As per Trefis analysis, ViacomCBS valuation works out to $48 per share, reflecting an upside of almost 20% from its current level..
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