ViacomCBS (NASDAQ:VIAC) has had a wild ride. Over the past year, VIAC stock shot up from $25 to $100. It just as quickly plunged back to $40, and remains around that price today.
ViacomCBS was part of the Archegos Capital Management situation. Archegos’ fund manager Bill Hwang bought up various stocks, including Viacom, with a massive degree of leverage. Once Archegos’ holdings started to lose value, the fund received margin calls and had to liquidate.
ViacomCBS was one of its largest positions, and thus the forced unloading caused shares to lose half their value in a matter of days.
Since that point, many bargain shoppers have come into VIAC stock expecting a swift rebound. And yet, shares have hardly moved. Are the dip-buyers correct, or is there still too much risk?
Viacom: The Bull Case
According to current analyst estimates, VIAC stock is trading at 10x 2021, 2022 and 2023 earnings. That’s right, analysts expect the company’s earnings-per-share to be exactly $4, give or take a few cents, each of the next three years. That works out to a clean 10x earnings multiple based on a $40 share price. As long as the company keeps earning $4 per share in perpetuity, it looks like a bargain at this price.
Viacom isn’t just letting its legacy business erode, either. The company is now making a big push on streaming with Paramount+. This offers many of Viacom’s best shows in one place. Unfortunately, Viacom licensed away many of its hit shows to rival streaming networks, limiting its library to some extent. However, over time, Viacom aims to build a stronger streaming package to compete with its peers. It also has its Pluto TV offering for an ad-supported streaming service.
Given Viacom’s cheap valuation, it should do well for shareholders if it can merely maintain a flat level of profitability while navigating the shrinking legacy business. Viacom has quickly increased its dividend payout in recent years. Additionally, at this valuation, it could be a compelling acquisition opportunity for other streaming companies looking to round out their content bundles.
Viacom: What Could Go Wrong
ViacomCBS is facing major structural challenges. Revenues had been flat for the past few years, and then declined in 2020 as Covid took its toll. The lack of growth is due to a popular trend: cord-cutting. Simply put, cable channels aren’t worth the same to consumers as they were a decade ago. Netflix (NASDAQ:NFLX) is earning more revenues and consumer watch time, and there are obvious losers as a result. The pandemic gave all media companies a boost as people had way more free time to enjoy content, but that tailwind is quickly ending.
ViacomCBS was arguably much too slow to try to chart a streaming course. Indeed, licensing off much of its content to rivals appears to have been a major blunder. Also, management probably should have pushed to merge more quickly. It’s now risking running out of suitors as others such as AT&T (NYSE:T) and Discovery (NASDAQ:DISCA) join forces while leaving ViacomCBS on its own.
It seems there is a high risk of this ending up like, say, the regional mall stocks did in 2017-20. For years, they’d been ticking along, seeing small manageable declines in their business. Then at a certain point, the department stores failed all at once and occupancy at the malls collapsed.
Several of the prominent mall real estate investment trusts (REITs) went to zero within a couple years. And, to be clear, the freefall started well before the pandemic. There’s the pervasive feeling that legacy TV is a lot like the malls were just before the economics tipped into the red zone.
VIAC Stock Verdict
In many debates, it’s clear which side is the winner. With Viacom, however, both sides have compelling arguments. VIAC stock is rather cheap based on its current profitability and outlook. As long as Viacom is able to maintain its present levels of prosperity — let alone achieve further growth — VIAC stock should perform well. Based on Viacom’s past results, the current share price looks like a real opportunity.
The question, though, is whether the next decade will look like the past one for Viacom. Will traditional TV continue to erode slowly, allowing Viacom plenty of time to milk its cash cow and create a streaming future? Or will the old cable model reach a tipping point where it suddenly becomes an untenable business model? Network effects can run in reverse as well. Once a business gets below a certain level of scale, it can rapidly lose relevancy.
I personally have no position in Viacom or other apparent media value stocks like Discovery. The risk of these being obsolete assets is just too high to get comfortable with. Does anyone really need Viacom in a world of Netflix and Disney’s (NYSE:DIS) Disney+? Time will tell. That said, if Viacom can figure out an effective digital strategy, shares are priced cheaply enough to make it work out well from here.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
