Neutral Outlook For ViacomCBS Stock As Company Struggles To Compete, Trim Business

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 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/h2

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).

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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/h2

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.