The original run up to $100, was based on the idea that the growing audience in its streaming video offering would justify its valuation. Yet Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Disney (NYSE:DIS) continue to dominate this market. What will it take for ViacomCBS shares to break out from here?
Bundle Plan to Lift VIAC Stock
On Sep. 21, the company announced a Paramount+ and Showtime bundled plan. The ad-supported “essential plan” will cost just $9.99 per month. This plan will also get viewers get sports content including NFL and soccer games. The commercial-free “premium plan” will cost $12.99 per month. Viewers also get on-demand entertainment with 4K, HDR, and Dolby Vision. Given the slightly higher price, chances are high that customers will opt for the commercial-free version.
In a presentation, Chief Financial Officer Naveen Chopra highlighted the company’s ability to create value out of its ecosystem. Bundling products across different services is central to that strategy.
Relying on advertising revenue will unlock incremental value. ViacomCBS’s EyeQ platform lets advertisers buy ads, and the cross-service bundles allow them to advertise to a wider audience. And since CBSViacom has partnerships in the connected TV platform space, including with Roku (NASDAQ:ROKU) and Amazon (NASDAQ:AMZN), these ads will reach viewers on a range of devices.
In August, ViacomCBS said it had sold its original headquarters building for $760 million. Although the firm has a debt of around $20 billion, it will use the cash raised for growth. While the market is hot, the company must fund its streaming ambitions and gain market share. By growing subscribers, VIAC stock could attract more value investors since it may earn $4 a share this year. Its forward price-to-earnings ratio is below 10x. For comparison, Disney shares trade at a ~ 35x forward P/E, and Apple stock trades at 25x.
Management could eventually increase shareholder returns by raising its dividend and buying back stock. But before that happens, It needs to scale its streaming business. The market has no moat and fickle viewers. VIAC may need a strong partner that lowers viewership churn. So selling its physical property to grow its online business is critical to its survival.
Strong Q2 Results for VIAC Stock
In Q2, VIAC posted earnings a share of 97 cents. Revenue grew by a modest 7.9% YoY to $6.56 billion. It added an impressive 6.5 million global streaming subscribers in the quarter. It now has 42 million. Revenue from subscriptions rose by 82% YoY to $481 million. Of the $6.56 billion in revenue, advertising accounted for $2.1 billion, while affiliate revenue added $2.1 billion.
For now, subscription revenue is not the positive driver for the stock. It will take a few quarters before the subscription segment becomes the biggest part of the business.
Investors seeking content suppliers may consider Lions Gate Entertainment (NYSE:LGF-A). Similar to VIAC stock, LGF shares have deep value. The company posted first-quarter revenue of $901.2 million. Importantly, global streaming subscribers were 16.7 million, up 58% from last year.
AMC Networks (NASDAQ:AMCX) is another alternative. The company posted non-GAAP earnings per share of $3.45. Revenue grew by 19.4% to $771.39 million. Chief Executive Officer Josh Sapan said the company benefited from targeted streaming with high subscriber satisfaction and strong consumption.
AMC+ is its fastest-growing service. Furthermore, CEO Sapan said, “Our streaming momentum and our expanding advertising efforts are enabling us to continue to meaningfully reconstitute the revenue mix of our company and to deliver continued growth and shareholder value.”
In the growth category, on the other hand, Apple and Netflix have the fastest-growing streaming services. They trade at a premium but offer better prospects.
Fair Value for VIAC stock
On Wall Street, the average price target for VIAC stock is $62.75, according to eight analysts (per Tipranks). In a five-year discounted growth exit model, ViacomCBS is still worth almost $60 at a perpetuity growth rate of 3.5%.
To break out, ViacomCBS needs a positive catalyst to attract bulls. Bears currently have a modest short float position of 7% against the stock. Readers may want to wait for Nasdaq’s valuation to correct to the downside. This would send Netflix stock lower and pull ViacomCBS shares down, too.
The more VIAC stock falls, the bigger the margin of safety.
Investors have plenty of time to build a position in ViacomCBS. Markets may grow fearful of Netflix stock if it corrects again. This would encourage value investors to consider VIAC shares to hold for the long term.
On the date of publication, Chris Lau 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.