PARA: ViacomCBS: Buy the Dip?

Investors had to endure another tough day yesterday as all major indexes lost momentum to end trading in the red. The tech-heavy NASDAQ fell 2% while stocks in the streaming space grossly underperformed the markets on March 24.

Shares of ViacomCBS (VIAC) were down 23.2% to end the day at $70.10 while shares of Discovery Communications fell 13.6%. It’s quite possible that investors are worried about the rising competition in the streaming sector coupled with high valuations that contributed to the recent sell-off.

Further, ViacomCBS also priced a stock offering as well as a convertible preferred stock offering to raise $3.06 billion. The dilution in shareholder wealth would have exacerbated the sell-off on March 24.

The net proceeds of the capital raise will be used to fund its streaming projects, confirmed ViacomCBS. We can see how creating or licensing content can be an expensive affair.

Further, investors might also be worried that Viacom’s legacy media business is not generating enough cash flow to support growth in its streaming vertical.

Shares of ViacomCBS are currently trading 33% below their 52-week high. Does this mean ViacomCBS is trading at an attractive multiple or is it a fundamentally weak stock?

ViacomCBS launches Paramount+

ViacomCBS is a media and entertainment company that operates through its TV Entertainment, Cable Networks, and Film Entertainment segments. Earlier this year, the company disclosed it will launch a streaming service called Paramount+. In short, it has revamped its previous streaming service which was known as CBS All Access.

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According to ViacomCBS, Paramount+ bundles live sports and breaking news with a strong portfolio of popular movies, marquee franchises, and hit series. ViacomCBS already has a library of 30,000 episodes, 2,500 films, and 1,000 live sporting events, making it one of the largest content publishers in the world.

The streaming platform will be priced at $9.99/month for a premium subscription while the ad-supported version will be cheaper at $4.99/month.

Recent Q4 results

In the December quarter, ViacomCBS saw sales gain by 3% to $6.9 billion while net income stood at $810 million or $1.31 per share. However, revenue for 2020 was down 6% at $25.28 billion.

ViacomCBS confirmed its global streaming subscribers stood at 30 million at the end of 2020. It accelerated domestic streaming and digital revenue growth by 72% in Q4 driven by a stellar rise in streaming subscription and streaming ad-sales.

ViacomCBS also increased affiliate sales by 13% and ad revenue by 4% in Q4. This allowed it to improve operating income, adjusted EBITDA and operating cash flows in the December quarter.

In 2020, ViacomCBS generated $2.2 billion in operating cash flows and $1.9 billion in free cash flow. It also ended the year with $3 billion in cash and another $3.5 billion in an undrawn revolving credit facility.

ViacomCBS is still trading at a premium compared to Wall Street

ViacomCBS is one of the largest entertainment platforms in the world and is valued at a market cap of $43.5 billion. Analysts tracking the stock expect the company to increase sales by 9.9% to $27.8 billion in 2021 and by 3.1% to $28.66 billion in 2022. However, its earnings are forecast to fall at an annual rate of 3.8% in the next five years.

This shows Wall Street expects ViacomCBS to spend heavily on marketing its streaming platform and create original content to drive subscribers and revenue growth over the long-term.

During the last earnings call, the company’s management said it expects the global subscriber base to expand between 65 million and 75 million by 2024. Comparatively, Disney+ has already breached the 100 million subscriber mark in just over a year since the streaming platform was launched.

It also means ViacomCBS will find it difficult to compete in a space that has multiple players including giants such as Netflix (NFLX), Hulu, Disney (DIS), and Amazon (AMZN). ViacomCBS stock is trading at a forward price to sales multiple 1.6x and a price to earnings multiple of 17.2x which is reasonable.

But it might even lose market share in an expanding streaming space which makes the stock a high-risk investment right now given there are much better companies you can invest in. Analysts have a 12-month price target of $58 for ViacomCBS which is 17% above its current trading price.

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VIAC shares were trading at $67.46 per share on Thursday morning, down $2.64 (-3.77%). Year-to-date, VIAC has gained 81.56%, versus a 3.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...