A 60% stock plunge was not the company’s fault, and our analyst thinks this trade has logic.
Unwinding unlucky investor Bill Hwang’s colossal bet has made US global streaming stock ViacomCBS (NASDAQ:VIAC) a lot more interesting, certainly in terms of price versus scope to re-rate underlying value with a massive investment programme.
In just over a week, the stock price plunged by 57% to just below $43. That followed the forced liquidation of numerous positions linked to Hwang’s $10 billion private investment firm Archegos Capital Management. Hwang used borrowed money to buy highly geared derivative products in a number of stocks, including ViacomCBS, but the banks demanded that money back when stock prices fell. Forced selling caused prices to plummet further.
This can look like “market efficiency” correcting an artificial rise due to traders chasing an ultimately failed leverage artist.
Yet I am intrigued given it helped ViacomCBS get away with raising $3 billion (£2.2 billion), mostly at $85 a share, on 24 March – representing 5% equity dilution - to develop its streaming content. This compares with a current market value of just over $27 billion.
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How sore for those participating, albeit potentially an advantage for new buyers, with the stock down yet the company replete with cash - not needing to resort to debt. Streaming is a rapid growth sector where an oligopoly of US firms including Netflix (NASDAQ:NFLX) and The Walt Disney (NYSE:DIS) have enjoyed global expansion fuelled additionally by the pandemic.
I would not wholly dismiss the ex-billionaire behind Archegos Capital Management. Bill Hwang's current demise underlines the lunacy of excess leverage, and how the financial system is at risk from time bombs lurking after years of monetary expansion has boosted risk-taking. Yet in very long-term context he has an astute record of stock-picking. We know that markets are prone to overshoot.
Roller coaster of the last 12 months needs context
One must bear in mind the context, with ViacomCBS soaring from $13 in March 2020 to over $100 a year later, valuing the owner of CBS, MTV, Comedy Central and Paramount Pictures at $60 billion.
Yet this is nothing askance on the long-term chart, which saw $50 to $60 over 2013, then a breakdown to $42 as doubts grew over the wisdom of the 2019 merger of Viacom and CBS – where the summary table of income statements shows revenue and profit subsequently easing. The plunge to $13 in March 2020 was triggered by the sell-off in response to Covid-19.
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But if earnings per share can at least consolidate from here – and arguably a $3 billion war chest implies a decent chance of underlying growth – then you are looking at a price/earnings (PE) multiple of around 11x versus Netflix on 90x earnings and Disney currently loss-making.
My hunch is that Hwang reckoned on potential for an improving PE, considering that the pandemic would herald a golden opportunity for streaming providers – potentially lasting years, with a permanent change towards more home-based entertainment. ViacomCBS was behind the leaders, but such a rising tide could lift all boats. It is an inherently speculative argument he should never have backed with extreme leverage, but it has logic.
Relatively small yet offering more balanced content
CBS actually launched its own streaming service – CBS All Access – back in 2014, which was re-named Paramount Plus only last month to emphasise the Paramount Pictures’ library of films alongside the popular Viacom and CBS TV shows.
The aim of its 2019 merger with Viacom was to exploit CBS’s breadth of programming and franchises for a better spread of content –including live sports and TV shows – versus Netflix and Disney, and also HBO Max and Amazon Prime. I lack experience of US media to fully judge, but viewer remarks online attest to subscribers appreciating a balanced offering.
ViacomCBS is a relatively smaller player, with around 30 million global subscribers versus 203 million for Netflix, 95 million for Disney and 60 million for HBO Max. The latter is owned by Warner Media, part of $219 billion AT&T Inc (NYSE:T) where management has ambitious plans for 120 million to 150 million subscribers by 2025. It looks a similar hope - to at least double them in the medium term - as ViacomCBS’s aim for 65 to 75 million subscribers by 2024. The global marketplace consists of some 360 million people who speak English as their first language, albeit 1.35 billion English speakers in a circa 1.8 billion total population.
The true size of market – as to who would actually tune in to such channels – is therefore anyone’s guess. CBS has just had a coup by way of the 8 March Oprah Winfrey interview with Prince Harry and Meghan Markle, which attracted over 17 million viewers and asserted the brand globally. So, if the $3 billion investment programme can evolve astutely, there looks genuine scope to build value. Paramount Plus will see greater new content and marketing, with live sports a pulling factor.
ViacomCBS Inc: summary income statements
Year to 31 December
|Cost of revenue||8,438||9,111||17,223||14,992|
|Continuing operations' profit||1,309||1,960||3,301||2,584|
|Diluted earnings per share ($)||0.88||5.14||5.36||3.92|
Source: historic company REFS and company accounts
UBS includes ViacomCBS in its top four streaming provider picks
The stock appeared unmoved by the Meghan Markle interview, but I think this current research note merits attention. Media analysts at UBS see the majority of net subscriber additions – at least in the US – as deriving from Disney and ViacomCBS, which will each add around eight million. It seems quite tricky to extrapolate globally, but it’s encouraging how a team of industry analysts endorses ViacomCBS this way.
AT&T, and also Discovery Inc (NASDAQ:DISCA), are each expected to add some seven million new US subscribers. Discovery Inc had also been held by Archegos and seen a rollercoaster ride – up from $19 last October to $77 five months later, but has slumped to $42.
This provides some comfort versus established market concern about how Netflix, Disney and Amazon Prime could consolidate their strength. UBS appear to tally with Hwang’s judgment, that content can still win through and novel offerings can help the relatively smaller operators out-perform.
Broadly, I think probability favours an extent of mean reversion, where ViacomCBS’s PE improves and the likes of Netflix ease. With fresh money, I would avoid Netflix and buy ViacomCBS.
Yes, a low PE reflects a chequered history for example where a previous management sold valuable content to Netflix, helping advance that company, and spent billions of dollars buying back stock at high prices than investing in streaming.
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But media is fast-moving, where quality can pay off. UBS’s citing ViacomCBS in its top tier for future growth, coinciding with a $3 billion capital-raise and a technically-driven stock plunge back to mid-January levels, looks attractive.
If US stocks were to top out generally, there is barely anywhere among them to hide. Yet the Biden administration is overseeing a colossal extent of stimulus, favouring spending power of the broader population, and Covid-19 will persist a good while. Raised demand for streaming looks able to coincide with improving content from ViacomCBS, boosting the chance its stock rating can improve. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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