ViacomCBS is Probably the Most Undervalued Streaming Company

ViacomCBS, Inc. (VIAC) stock hit a fresh 52-week high of $101.97 on March 22, but shed 50% of its market value in just 5 trading sessions.

This downfall was caused by Archegos Capital Management being forced to dump its entire ViacomCBS holding to comply with margin calls. The substantial decline in the stock price had nothing to do with company fundamentals.

Fortunately, first-quarter financial performance of ViacomCBS confirms the company is well-positioned to report stellar earnings growth in the future. Market share gains in the OTT content streaming industry strongly support this mass media company.

In comparison to many streaming giants including Netflix, Inc. (NFLX), ViacomCBS is very attractively priced in the market. The stock offers investors a good opportunity to gain exposure to the fast-growing streaming industry at a cheap price.

A Strong Start To 2021

On May 6, ViacomCBS reported first-quarter earnings per share of $1.52, beating the Wall Street consensus estimate by 30 cents. Reported revenue of $7.4 billion for the quarter was a year-over-year increase of 14% as well, and more importantly, more than $130 million higher than analyst predictions.

ViacomCBS owns and operates 3 streaming platforms: Paramount+, Pluto TV, and Showtime. The global streaming subscriber base (Paramount+ and Showtime) increased by 6 million to 35.9 million users in the first quarter, and Pluto TV monthly active users increased by 6.4 million to 49.5 million users as well. (See Viacom stock analysis on TipRanks)

Hybrid Format Brings Promising Outlook

Grand View Research projects the global video streaming industry will grow at a compounded annual rate of 21% through 2028. This stellar growth will present multiple opportunities for market-leading streaming companies in the next few years. The Asia-Pacific region will be at the forefront of this expected growth because of favorable demographic trends and the billions of dollars that are pouring into IT infrastructure development projects there.

ViacomCBS is the only streaming service provider to embrace a hybrid business model. Paramount+, the flagship streaming service offered by the company, charges a subscription fee similar to that of Netflix. Pluto TV, on the other hand, is a free streaming service owned by ViacomCBS and gives users access to more than 250 live TV channels, including Comedy Central, Nickelodeon, and MTV. ViacomCBS has introduced commercial breaks to monetize this platform, and the strong momentum seen in Pluto TV usage in the March quarter is a testament to the success of this model.

ViacomCBS’ unique hybrid model is likely to help the company gain traction in both developed and emerging markets in the future. The company is well-positioned to cater to the requirements of both users who prefer to pay a subscription fee to bypass commercial breaks, and users who accept advertisements as long as the platform is available for free.

To capture the lucrative opportunity available in international markets, ViacomCBS launched Pluto TV in France in the first quarter. With this, the service is now available in 25 markets including Brazil, the United Kingdom, and Spain. Paramount+ was launched in Latin America, Europe, and Canada as well, and the company is eyeing entry into the Asian market.

Setting ViacomCBS apart from the competition is the wide variety of programs available on its platforms, including original TV shows, movies, and live sports. This content advantage, coupled with its unique business model, is likely to deliver double-digit earnings growth in the coming years.

Wall Street’s Take

The sharp decline in the stock price in late March has pushed the company into undervalued territory, according to many analysts.

On May 10, Barrington Research upgraded ViacomCBS, citing favorable valuation. It assigned a price target of $50, which implies upside of more than 25% from the current market price.

Wells Fargo analyst Steven Cahall and RBC analyst Kutgan Maral upgraded the stock last week as well, citing streaming momentum and attractive valuation.

Wall Street analysts have assigned ViacomCBS stock an average analyst price target of $53.57, which implies upside potential of 34.60%.

Takeaway

In contrast to Netflix, which trades at a lofty price-to-earnings ratio of 48, ViacomCBS stock is valued at a P/E of just 10, which suggests ViacomCBS is significantly undervalued from a relative valuation perspective. First-quarter earnings of the company highlighted the strong momentum behind the 3 streaming platforms owned by ViacomCBS. The brand value, deep content library, hybrid business model, and access to live sporting events rights are all catalysts that will serve company growth in the next decade.

Disclosure: Dilantha De Silva owned ViacomCBS shares at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.