ViacomCBS (NASDAQ:VIAC, NASDAQ:VIACA) shares have been hammered on the unwinding of a massive position by Archegos Capital. The entertainment conglomerate has lost more than 50% of its market capitalization since mid-March. But despite what the market says, VIAC stock isn’t fundamentally broken.
In fact, the blowup has created a perfect opportunity to buy VIAC shares now.
VIAC Stock: Base Hits Win Ball Games
If you’re tired of seeing your teenager’s Dogecoin (CCC:DOGE-USD) rise 500% for no reason, stocks like ViacomCBS tell us one thing: “slow and steady” investing still wins in the long run. Over the past 12 months, ViacomCBS stock has risen 163%, beating hot names like Sundial (NASDAQ:SNDL) and other popular Reddit stocks.
VIAC stock has always been somewhat expensive; purchases by a mysterious entity (now unmasked as Archegos Capital) pushed VIAC up to $100 — a 36x EV-to-EBITDA valuation. But the shares’ sudden 50% reversal provides investors with a rare chance to buy into one of media’s most underrated turnaround stories.
Since the company’s merger with CBS in December 2019, the media giant has faced all sorts of challenges — from having to integrate a huge acquisition, to dealing with the coronavirus pandemic, to shifting its business model to focus on streaming. And, the numbers don’t tell a good story. The TV dinosaur — whose broadcast lineup includes such properties as Nickelodeon and Comedy Central — is getting steadily devoured by streaming titans Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Disney (NYSE:DIS) and Apple (NASDAQ:AAPL).
“Cord cutting” has resulted in a precipitous decline of pay-TV households, with cable subs expected to bottom out at 50 million over the next 5 years. While ViacomCBS claims 19.2 million viewers, Netflix has over 203 million paid global subscribers. Just to add a bit more salt in the wound, Netflix is also is adding newcomers to the tune of over 8 million per quarter. Amazon and Disney+ are closely behind, at 150 million, and 100 million, respectively.
More Than a Numbers Game
With this wide a gap, no one expects Viacom to catch up to Netflix. But the company doesn’t have to catch up. It just needs to start running faster.
In March 2019, Viacom did just that by acquiring free, ad-supported streaming TV platform Pluto TV, adding 12 million subscribers. Last month, it rolled out a more comprehensive streaming service called Paramount+. The service features a catalog of more than 30,000 episodes, 2,500 movie titles and over 1,000 live sporting events, plus around-the-clock news coverage. Early subscriber figures are still hazy, but totaled around 8 million as of November.
On the surface, Viacom’s streaming strategy might look too little too late. But investors need to remember that this is a turnaround story. Winning isn’t necessary. If the company can effectively “run in place” with its cableTV business — or at least, slow the pace of its decline — it has a real shot at converting these subscribers onto its streaming platform. A combination of live news and sports, combined with subscriber inertia and laziness, can keep a diminished bundle alive long enough for Viacom to transform the business.
Doubters can look at Disney. In October of last year, the company announced a restructuring of its media and entertainment businesses in order to focus on streaming. Disney’s stock has since jumped 34%.
Gateway to the Good Stuff
CBS is still the most watched TV network in the U.S. Almost 6 million viewers tune in for Paramount, Nickelodeon and NFL football. This base gives Viacom a good head start in converting its users to streamed content. Pluto TV is essentially a gateway, luring subscribers in with free content with the hope of converting them into paying subscribers of Paramount+. It also gives Viacom access to a growth demographic — a much younger audience than a typical pay-TV subscriber.
Viacom has already started this conversion process with Showtime by unlocking a selection of programming for free on PlutoTV. The company will also stock Paramount+ with original series related to existing franchises including The Godfather and SpongeBob SquarePants.
More Than Running in Place
No doubt, it’s still early. But Viacom’s recent performance proves the strategy can work. In Q4, the company reported 19.2 million U.S. streaming subscribers, up 71% year over year. And Viacom thinks it can run faster still, targeting 65 to 75 million streaming subs by 2024. To do this, the company is following industry leader Netflix’s playbook: invest in high-quality original content and hopefully come up with a zeitgeist-capturing hit show. A $5 billion content investment goal through 2024 should help, as will cash from its recently completed $3 billion convertible offering.
Every step Viacom makes toward steering the business toward streaming has a huge impact on the financial model. For every cable TV subscriber that doesn’t cancel their cableTV service, the company can redirect this cash flow toward its streaming growth engine. Add to that steadily improving metrics in the cable TV business, and you start to see evidence of a sustainable turnaround.
In fact, Viacom posted solid Q4 results. A 4% climb in advertising revenue in the quarter and a 13% climb in affiliate revenue are nothing to sneeze at.
Let’s Not Throw the Baby Out With the Bathwater
With an appetite for content clearly in place and money to burn, Viacom has a legitimate shot at transforming its business. Winning isn’t necessary. Not every cable subscriber has to become a streaming subscriber.
In order for the long-term case in ViacomCBS stock to work, the company just needs to show there’s a new growth engine in place that looks more like Netflix, and less like a dinosaur. As the company’s streaming services continue to gain traction, VIAC shares should see significant multiple expansion.
The stock offers a combination of reasonable growth targets and an attractive valuation. At 11x forward earnings — a discount to the sector medium at over 21x — the bar is set very low.
Longer-term, we see a path for VIAC stock to be worth $70 or more, driven by the company’s push into streaming and the value of its media assets.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
