- VIAC is a hybrid of traditional media with streaming services
- The market struggles with how to value this company
- The Wall Street analyst consensus is that the shares will rebound in the next year
- The market-implied outlook for VIAC continues to be bearish
Major media player ViacomCBS (NASDAQ:VIAC) operates a pair of legacy businesses along with a rapidly scaling streaming media platform. The major challenge for the firm is that it is trying to compete on both fronts.
VIAC faces Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) on the streaming side and Discovery (NASDAQ:DISCA) and Fox (NASDAQ:FOX) on the traditional media channels. VIAC is attempting to pare down the breadth of offerings, as seen with the annoying efforts to sell off publisher Simon and Schuster.
The extreme runup in the share price in early 2021, along with the even faster decline, is attributed to large leveraged positions on VIAC placed by Archegos Capital Management. The volatility and uncertainty triggered by Archegos margin calls and subsequent selling have somewhat obscured meaningful price discovery for VIAC over the past 12 months.
Source: Investing.com
On Nov. 4, 2021, the company reported Q3 results, with 62% growth in streaming revenue compared to Q3 of last year. The company has almost consistently beaten earnings expectations over recent years and, notably, even as the share price has fallen during the past year. The expected EPS for Q4 is very low. Even though this is expected, the potential market response when Q4 results are announced is hard to predict. Even a significant EPS beat on a percentage basis could result in the lowest quarterly earnings in years, for example.
Source: E-Trade
I last wrote about VIAC on September 9, 2021. At that time, there was significant disagreement on the stock.
The Wall Street analyst consensus outlook at that time was that the Archegos-driven decline was too extreme, and the consensus 12-month price target implied expected price appreciation of 26%-52%. The consensus view from the options market was very different, with a bearish outlook.
The options market indicated that the maximum-probability outcome was a return of -10% to the middle of January of 2022 and -14% to the middle of March. The implied volatility was high, as well.
Given the substantial disagreement between the analysts and the options market (the traders’ consensus view), I compromised on a neutral rating. Since the article was published, VIAC has had a price return of -26.19%, as compared to +5.61% for the S&P 500.
Most readers will be familiar with the Wall Street analyst consensus, but many will not have encountered the idea that it is possible to calculate the consensus outlook from buyers and sellers of options on a stock. The price of an option on a stock reflects the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires.
By analyzing the prices of call and put options at a range of strike prices, all sharing the same expiration date, it is possible to calculate a probabilistic price return forecast that reconciles the options prices. This is referred to as the market-implied outlook and represents the consensus view of buyers and sellers of options.
With almost 4 months since my last analysis, and the substantial declines in the share price over this period, I have updated the market-implied outlook for VIAC with current options prices. I have revisited my position on VIAC, considering the market-implied outlook and the current Wall Street consensus.
Wall Street Consensus Outlook for VIAC
E-Trade calculates the Wall Street consensus outlook from the views of 12 ranked analysts who have published price targets and ratings over the past 90 days. The consensus rating is bullish and the consensus 12-month price target is 55.7% above the current share price. There is an enormous spread between the individual price targets, suggesting little agreement.
Source: E-Trade
Investing.com calculates the Wall Street consensus using ratings and price targets from 26 analysts. The consensus rating is bullish and the consensus price target is almost identical to that calculated by E-Trade. Also consistent with E-Trade, the dispersion among the individual analyst price targets is very high.
Source: Investing.com
A significant red flag in looking at the analyst price targets is the enormous spread. Academic research has found that the consensus price target has predictive value when the dispersion in price targets is low, but that there is a negative correlation between consensus-implied returns and actual outcomes when the spread is high.
In other words, a high price return expected from the consensus tends to predict a price decline when the spread in the individual price targets is high. As a rule of thumb, I discount the consensus when the highest price target is twice or higher than the lowest price target. This was the case when I analyzed VIAC in September and the spread is even more extreme today.
Market-Implied Outlook for VIAC
I have calculated the market-implied outlooks for VIAC to the middle of 2022 (using options that expire on June 17, 2022) and to the start of 2023 (using options that expire on January 20, 2023). I chose options at these two expiration dates because they allow outlooks that are closest to 6 and 12 months from now.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlook for the 5.5-month period to June 17, 2022 is generally symmetric, although the maximum-probability outcomes (the peak of the probability distribution) favor negative returns over this period. While the peak in probabilities is broad, the middle of the peak corresponds to a price return of about -8%. The annualized volatility calculated from this distribution is 43.6%. This is quite high for an individual stock and is almost identical to the expected volatility that I calculated in September.
To make it easier to directly compare the probabilities of positive and negative returns of the same size, I rotate the negative return side of the distribution about the vertical axis (see chart below).
The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from E-Trade)
This view shows that the probabilities of negative returns are substantially and consistently higher than for positive returns of the same magnitude (the red dashed line is well above the solid blue line for a wide range of the most-probable outcomes). This is a bearish view for VIAC.
Theory suggests that the market-implied outlook should tend to have a negative bias because risk-averse investors are willing to pay more than fair value for put options. Even so, the magnitude of the negative tilt supports a bearish interpretation.
The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from E-Trade)
The market-implied outlook through 2022 (calculated using options that expire on January 20, 2023) is consistent with the view to the middle of the year. The probabilities of negative returns are consistently elevated relative to positive returns and the expected annualized volatility is 44.4%. There are two peaks in probability, corresponding to price returns of -5% and -17%, but these specific values are not especially meaningful. Overall, this is a moderately bearish outlook for 2022.
Bottom Line
The key issue in considering VIAC is the company's struggles with having too broad a suite of businesses. Management is attempting to narrow the focus on streaming content.
The potential for the success of the firm in selling off peripheral business and competing with the leaders in streaming media is not at all clear. The uncertainties in the outlook are reflected in the high levels of disagreement among the Wall Street equity analysts. The consensus rating is bullish, but the dispersion in price targets is substantial.
The market-implied outlook for VIAC is bearish through 2022, with high volatility. There is certainly upside potential, but the current risk-return trade off is not appealing. In balancing the bullish Wall Street consensus and the bearish market-implied outlook, I am maintaining my neutral view on VIAC.