I believe ViacomCBS (VIAC) is an under the radar way to participate in one of the strongest trends in the post Covid world - the streaming of entertainment content. But it is also a defensive way (low 7x CY20 PE and 3.3% dividend yield vs the S&P at 25x and a 1.8% dividend yield) to take on this investment risk.
The streaming business of ViacomCBS includes: 1) CBS All Access, 2) Showtime, 3) Pluto TV, and 4) digital ad revenues. The crown jewel within their streaming business is CBS All Access & Showtime streaming subscriber revenues. For the full year 2020, I estimate these subscribers will generate $1B in revenues growing 50% y/y and accelerating throughout 2020. Covid has an increasing number of housebound people searching for content to stream and ViacomCBS has some of the best in the business. This includes: 1) original content like Mission Impossible, 2) live sports like the NFL, and 3) live news for these tumultuous times. I believe total streaming subscribers will grow as a result from 11M at the end of CY19 to 20M by the end of the year.
Additionally, Viacom has PlutoTV, the #1 free ad supported TV streaming service with 27M monthly active users.
Altogether, I estimate total streaming revenues for Viacom should be up nearly 40% from $1.6B in CY19 to $2.2B in CY20. For comparison, Netflix is expected to grow CY20 revs by 23% and has an Enterprise Value/Sales ratio of 8.4x. If I use this multiple on the total streaming revs of Viacom this year of $2.2B, I end up with a value of $18.5B for just this business.
But there are clearly risks related to people cancelling their cable/satellite service, depressed advertising revs during Covid and debt levels that need to be considered. This can be reduced by shorting less well positioned cable/satellite companies and other more highly valued & levered companies affected by Covid. Given these risks, if we assume the rest of the business deserves only a 4-5x price to earnings ratio, this implies a total valuation of $40-50 per share for VIAC versus $29 where it trades today. Furthermore, with over 20% adjusted free cash flow growth to $1.5B in 2020, the risk to reward and potential upside is too compelling to ignore.
Dan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund.