It has been a while since I last covered VIAC. Anyone who bought and held would have seen mediocre gains of 30% since then, though technically the stock went up nearly 400% for a time. Though I do not write all of my trades, buys and sells – because who has the time? – I did suggest to folks to take profits as it was rising to $100, including personally telling people I sold half at $80 and the rest at $95 because it had gone up way too fast. Given all that has happened since the last article, it seemed a good idea to share where I think this stock stands in a long-term portfolio.
The Business…
ViacomCBS is basically a content producer for TV and streaming. The global media and entertainment company includes Viacom, CBS, and Paramount assets, plus Showtime and Pluto TV. They make money through subscriptions, advertising as well as licensing and producing content for other companies. They have legacy assets that leverage the CBS cable network, they have the movie production side (Filmed Entertainment) which is mainly Paramount Pictures, and they have the fast-growing streaming business through Paramount+, Showtime and PlutoTV.
While many people believe that cable is doomed to die over time, the CBS network is the most-watched network in daytime and late-night TV. They have had the #1 or #2 position in nearly all categories of legacy TV for quite a while. Even if the business is slowly losing customers with the ‘death of cable’ and people ‘cutting the cord’, it brings in revenue and the content can be licensed out to others for a fee, allowing the content to bring in more income after it airs on TV. The biggest challenge they have is deciding how much content to license out, and how much is kept for their own streaming options.
The Profits…
Q3 results, from November, showed that ViacomCBS brought in revenue of $6.61 Billion dollars, which was up just over 13% YOY. This missed GAAP EPS estimates by $0.11, with Non-GAAP being in-line. The biggest news from their results showed that they had added 4.3 Million global streaming subscribers (mostly Paramount+), bringing their total to almost 47 Million. This brought in streaming revenue just over $1 Billion dollars for the first time. Pluto TV, the free service with ads, generated 48% YOY growth via ad revenues and the service had over 54 Million active users. (“Free” streaming services tend to be quite profitable, as the ad revenue more than makes up for the fee most would pay to subscribe monthly. So the growth of Pluto TV is quite profitable for ViacomCBS.)
Of course, these numbers are a few months old and we await the final quarter and full-year results for 2021, which will be presented on February 15th. I expect a nice-sized “surprise” bump in growth in streamers. (The reason I put surprise in quotes is people who follow the company closely can see that they have shared a few growth opportunities that should have kicked in late in 2021, with more coming in 2022.)
During the Q4 quarter, which they will announce results on soon, Viacom sold the CBS Studio Center. They sold this 55-acre space in Los Angeles for $1.85 Billion. (This was a group of famous production centers and offices that produced Gilligan’s Island and Seinfeld, plus newer shows like Brooklyn Nine-Nine.) They also got news that the U.S. Justice Department was suing to block the sale of Simon & Schuster (a Viacom-owned book publishing business) to Penguin Random House. The deal was expected to be for just over $2 Billion in cash. While the cash would have been nice, S&S is profitable and will likely fetch a similar bid at some point in the future if they still intend to sell. If the deal falls apart, Viacom will likely get a termination fee and resell. (If fought in court, it appears that Penguin Random House will be on the hook for the lawyer bills, not ViacomCBS.)
Where Might Future Growth Come From?
While Netflix (NFLX) and others provide plenty of competition for subscriber eyeball time, Viacom is showing great potential for more users in the coming year. They have two nice ways to grow subscribers with the T-Mobile and Comcast partnerships. Let’s quickly dissect the two deals…
ViacomCBS and T-Mobile announced a partnership for Viacom content to be distributed to T-Mobile customers starting in Q4 of 2021 – which they will report on soon – and ramping up in 2022. They telegraphed the growth during the last earnings call when Naveen Chopra, CFO, stated that the deal would, “have a modest benefit in Q4” but that it would “be a more significant contributor in 2022” once they started promoting the content. Chopra’s best quote, in my opinion, was this gem… “In fact, we expect streaming revenue to surpass a $5 billion annual run-rate in the quarter”, referring to Q4 – the results we expect soon.
Viacom also has a partnership with Comcast/Sky to launch “SkyShowtime” in 2022, with an expectation that will roll-out to over 20 countries, mostly in Europe. The deal will include content from Sky and NBCUniversal – both owned by Comcast – plus content from Showtime, Nickelodeon and Paramount Pictures – owned by ViacomCBS. The service is expected to launch with 10,000+ hours of content early in 2022. While we have not seen all the details, it will increase both companies’ subscribers overseas while sharing the costs involved in reaching them. NBCUniversal and ViacomCBS have respectable 54 million (Peacock) signups and 42 million (Paramount+ specific) subscribers. However, these numbers are not as big as Netflix, Disney (DIS) and Amazon. But the synergistic deal should assist both companies, save money from going it alone, plus allow for increased growth rates.
We should continue to expect the streaming wars to be quite fierce, with tons of competition. However, even the giant Netflix has shown plenty of slowing growth and forecast a model 2.5 million net subscriber additions for the upcoming quarter. ViacomCBS gained 4.3 Million users during Q3, and the company is forecasting a good deal more in the future, while Netflix – a company valued at roughly eight times the size of ViacomCBS – guided to only 2.5 million users in their upcoming Q1. This discrepancy leads to a valuation that should be looked at.
Valuations and Comparisons
We can all probably agree that Netflix, Disney and Amazon Prime Video are the companies that dominate streaming today. However, possibly because they are so well known, the market is giving them more credit than they currently deserve for future growth. This is while ‘tiny-little’ Viacom does not get the same credit for its growth, even though Netflix and Prime Video rely on Viacom companies to provide content for them. This is a discrepancy that I have never been able to shake off…
The above image shows many of the better-known content companies with streaming ambitions. It seems simple to see that the big three (Netflix, Disney, and Prime Video) get much higher Forward PE ratios, making Viacom a much better value. If Viacom were to be rewarded with a similar PE ratio per subscriber as Netflix, it would more than triple from today’s price. This does not factor in the nice and safely covered dividend, plus the growth percentages Viacom top brass has forecasted to see very soon. In fact, even Discovery and Lions Gate Films get a better overall valuation from the market currently. I believe this is a big mistake, as growth and profits have been improving for Viacom, and more is coming.
The Biggest Overhangs…
First Hinderance… At present time, it seems that one hinderance to Viacom stock price is continued squeamishness over the Archegos debacle. For background, Bill Hwang ran the office of Archegos Capital Management. Archegos was over-leveraged and owned a lot of Viacom shares, amongst others. After the very quick run-up in stock price, the Viacom board took a secondary stock offering to gain from the unusual rise. (This was rather smart/shrewd.)
After the stock offering was announced Viacom stock dropped which caused even more issues as the Archegos assets were seized and sold off. (Luckily, I had sold – and advised others to do the same – before this crash came.) However, Viacom stock trades roughly at the same place it was at before this event – even though profits and users have increased.
Second thing… Most Tech stocks have been heavily selling-off since late 2021. Streaming companies have been included in this selloff. Given how inflated many things in the market are currently, it is also highly probable that we see more selling pressures. However, Viacom has almost always been a value name in the industry niche, even though they have both growth and technology involved in what they do. They also have a much more reasonable value price than nearly all competitors.
Third, possibly biggest, Issue… In short… Shari. It is impossible to really discuss Viacom without acknowledging that the Redstone family, led by Shari Redstone, holds just over 77% of VIACA voting shares through its ownership of National Amusements. The family has controlled the fate of Viacom for decades.
While in other companies a board with lots to lose would be considered a good thing, however, it works against Viacom to have so much control in the hands of one family. The market tends to second guess whether the family has the best interest of stockholders at heart. In actuality, it would seem to me that they have plenty of interest in seeing the company succeed going forward, but I digress.
Future Thoughts…
Plenty of speculation exists on what will happen with Viacom assets. (I have speculated myself!) I personally believe that Viacom will sell (or merge) in the future to create a larger company that can more directly compete with Netflix and Disney+. For now, ViacomCBS and Comcast are working together on expanding their presence in international markets, but this could become an intriguing partner in the future. However, Viacom doesn’t have to combine or merge in order to stay profitable. The board has already continued to grow the companies reach, and profits. They can continue to provide content for other streaming companies and stay quite profitable – even if you thought it was in hopes of a higher offer in the future.
The truth is that Viacom has an ARPU of roughly $11 per user, per month. With content like Mission Impossible, all of the Star Trek universe, PAW Patrol, Perry Mason, Spongebob, Blue Bloods, SEAL Team, Yellowstone/1883, South Park and many more things, it’s hard to argue that they know how to create content. Their users are growing and appear to that they will move rather quickly up in 2022. As they continue to grow, so does profit.
Over a year ago, I wrote that ViacomCBS was “Getting It Right In Streaming” and I believe they still are. ViacomCBS is currently one of the fattest pitches I see in the value/growth market, and I intend to be swinging for the fences with the name. There is plenty of easily visible growth ahead for this undervalued name. I would encourage long-term, strategic thinkers to investigate ViacomCBS more and consider doing the same. A few years from now I believe this company will be much larger and/or have received attractive offers from other competitors.