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Aug 8, 2021
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Although Pluto TV is considerably smaller than Roku, it is growing faster and is forecasted to surpass Roku's active users this year.
Streaming subscribers are also growing at a high rate, ViacomCBS added 12M subscribers in the first half of the year and reached 42M global subscribers.
The decline in traditional TV viewing is a headwind, but growth in streaming and Pluto TV will more than compensate for it.
A conservative DCF Model gives us a fair value of $65.79 per share, 58.5% above the current price of $41.50.
The entire traditional media industry is in a difficult transformational period, with consumers shifting away from traditional TV to streaming, companies are being forced to adapt or slowly wither away. ViacomCBS (VIAC) is no different, even though the merger put it in a much stronger position to compete in streaming, it still faces a few difficult years ahead.
As revenues from traditional TV ads and subscribers inevitably fall, growth from streaming subscriptions and Pluto TV will be essential to offset this fall. Streaming revenues are forecasted to be $4.3 billion this year, 15% of total revenues, with a growth of 67% y-o-y, far ahead of the initial guidance given by management.
Source: 2020 Q4 earnings presentation ViacomCBS
Pluto TV has proven to be a key asset and an invaluable acquisition. As linear TV ad spending shifts to connected TV, Pluto TV stands to capture a sizable share of the market with its fast-growing user base. The company has already grown from $70 million in revenue in 2018 to over $1 billion expected in 2021, more than doubling revenues for four consecutive quarters.
Streaming subscriptions have not been slacking either. After rebranding CBS All Access to Paramount+ last March, ViacomCBS added 12M subscribers in the first half of 2021, and with a Paramount+ planned launch in Europe in 2022, the segment is forecasted to experience outstanding growth in the following years.
Pluto TV Pluto TV is a free ad-supported internet TV service, similar to The Roku (ROKU) Channel. It is available as an app in most smart TVs, iOS and Android, and can also be accessed through the web Pluto.tv.
Pluto TV active users
Source: 2020 Q4 earnings presentation ViacomCBS
Viacom acquired the company for $340 million in January 2019. Since then, Pluto TV has quintupled its active users and more than tripled its ARPU with no signs of stopping.
Although ViacomCBS does not report revenues separately for Pluto TV, CEO Bob Bakish commented in the latest earnings call: "we now, in fact, expect Pluto TV to comfortably generate more than $1 billion in revenue this year."
Applying the current 2021 ~x18 sales multiple of Roku to Pluto TV gives us a valuation of at least $18 billion. At the current price of $41.50 per share, VIAC is worth ~$27 billion and has ~$12.3 billion in net debt, for a total enterprise value of ~$39.3 billion.
While the multiples of Roku may be deemed to be too high by some, it is what the market is currently valuing it at. I am using the same multiples since both companies are in the same industry and Pluto TV is actually growing faster. In 2021 Q2, Pluto's revenue grew 169% while Roku's platform revenue grew 117%.
In addition, if we remove the hardware revenue component from Roku, which has negative margins, Roku is trading at ~23x times 2021 platform revenue, giving us a valuation of at least $23 billion for Pluto TV.
Pluto's revenue grew 169% in the quarter. This tremendous expansion of the business has been driven by growth in users' engagement and sell through. Domestic watch time per MAU increased 45% year-over-year in Q2, and Pluto TV domestic ARPU more than doubled year-over-year
Source: 2021 Q2 earnings call transcript ViacomCBS
Active users comparison
Millions of active users Pluto TV. Roku 2019 Q4 24 36.9 2020 Q4 43.1 51.2 2021Q1. 49.5 53.6 2021Q2. 52.5 55.2
Streaming subscriptions Streaming subscriptions include Paramount+, Showtime OTT, BET+, and Noggin. Although VIAC is late to streaming and is considerably smaller than the current leaders Netflix (NFLX), Disney (DIS), and Discovery(DISCA) / WarnerMedia (T); Paramount+ has an enormous library of content and offers a unique value proposition with sports programming, news, and reality TV. It also has a sizable investment in content, with $15 billion spent in content in 2020.
Source: 2021 Q1 earnings presentation ViacomCBS
Streaming subscribers comparison
Millions of subscribers 2019Q4 2020Q4 2021Q1 2021Q2 ViacomCBS 19.2 29.9. 35.9 42.4 Disney+ 26.5. 94.9. 103.6. N/A HBO. N/A 61 63.9 67.5 Netflix 167.1 203.7 207.6 209.2 Discovery N/A N/A 15 17
VIAC's management forecasted 65M-75M global streaming subscribers by the end of 2024, but the excellent performance of the launch of Paramount+ in the US shows that this target was extremely conservative.
ViacomCBS streaming subscribers
The recently announced partnership with Sky to launch Paramount+ in Europe in 2022 will also considerably boost subscriber growth. Analysts have already increased their subscribers' forecast and are now expecting 66M subscribers by the end of 2022. At this rate, we could see 80M subscribers by the end of 2023.
Streaming subscriptions revenue is on track to reach close to $2 billion in revenue this year (70% y-o-y growth), and this does not include the advertising revenue from the ad-supported Paramount+ subscription. This is quite small compared to giants like Netflix, but its fast growth will be more than enough to offset the decline in revenue from the traditional business.
Traditional Business When thinking about the traditional business, two things come to mind: secular decline and cannibalization. As consumers continue to move away from linear TV; advertising, affiliate, and licensing revenues will inevitably fall. The next few years will be especially hard for earnings growth as ViacomCBS has to increase its spending to grow its streaming business, adding pressure to margins.
Source: 2021 Q2 Trending Schedules ViacomCBS
Some investors might be rightfully concerned that streaming will simply replace the current linear TV revenues with lower margins as consumers just shift from one platform to another. ViacomCBS' management recently put those concerns to rest as it claimed that streaming will lead to both higher ARPUs and user reach.
Streaming presents a compelling market opportunity for two key reasons; one, unit upside where streaming allows for a greater addressable base of viewers go linear and two, ARPU upside because streaming ARPU's have a more compelling long-term trajectory than linear. The unit upside is especially true internationally where streaming allows us to reach beyond the Pay TV universe, which has limited penetration in many international markets.
Source: 2021 Q1 earnings call transcript ViacomCBS
The traditional business may be in decline, but it still has revenues comparable to those of Netflix, which will allow ViacomCBS to compete in content spending as its streaming business matures.
Using a DCF Model to value ViacomCBS Current analyst estimates guide for flat operating income, flat free cash flow, and revenue growth of ~3% until 2023. After 2023, I am forecasting that ViacomCBS will start to temper its investment in content and start growing free cash flow again, with a long-term earnings growth rate of 3%. Here are the assumptions of the model:
Operating expenses will remain as 22.5% of revenues, this is consistent with the average of the last three years. Content expenses will grow so that operating income and free cash flow remain flat until 2023. After 2023, content spending will start to slow down.
For reference, changing the terminal EBIT growth rate would give us the following values per share:
0% growth: $40.07 1% growth: $46.34 2% growth: $54.55 4% growth: $82.09 5% growth: $107.88
As you can see, ViacomCBS is currently being priced like a company that will never grow its earnings. While I do agree that the next 3-5 years will likely see no or little earnings growth as the bulk of the transition to streaming takes place, I find it highly improbable that earnings will remain stagnant forever.
The focus on short-term earnings pressure is overshadowing the long-term growth that will come from Pluto TV and streaming. Paramount+ is growing considerably faster than initially expected and Pluto TV has a leadership position in the high-growth connected TV market.
ViacomCBS is a buy for the long-term, as it is the most undervalued media entertainment company in the market. The next 3-5 years will be a transition period with flat earnings growth, but the investment in streaming will pay off and generate strong returns for long-term-oriented investors.