It’s not a good time to own broadcast channels, cable channels and movie theaters. Since those are the main businesses of ViacomCBS (NASDAQ:VIAC), investors should sell VIAC stock.
I see some parallels between cable TV now and radio in the early 1950s. Just as television was quickly supplanting radio as the main in-home entertainment vehicle then, streaming is rapidly taking the place of cable TV now. And just as radio didn’t disappear but was reduced to in-car entertainment and background music, I expect few viewers will stick to cable as it loses relevance.
But unfortunately for ViacomCBS and its peers, there’s an important difference between the radio-to-TV transition and the cable-to-streaming transition.
The radio networks that added TV stations benefitted from booming revenue and profits. Conversely, the streaming revolution is undermining the bottom lines of cable TV companies, including ViacomCBS.
And to make matters worse for ViacomCBS, which owns movie studio Paramount, the conventional movie business has also been upended by streaming.
An Uninspiring Start for Paramount Plus
After launching its rebranded streaming channel in March, ViacomCBS has said its streaming offerings (excluding Pluto TV) have a combined 36 million subscribers.
Conversely, WarnerMedia’s HBO and HBO Max have more than 63 million subscribers and Disney’s (NYSE:DIS) Disney+ has 103.6 million subscribers. Paramount Plus is even further behind Netflix, which has 208 million paying subscribers.
On a positive note for ViacomCBS, Pluto TV has 50 million monthly users and is expected to generate more than $1 billion of ad sales for the company in 2022.
But the overall performance of the company’s streaming offerings has been disappointing. ViacomCBS chairman Shari Redstone has held talks with Comcast (NASDAQ:CMCSA) regarding a potential streaming partnership. However, there have been rumors that the companies will join forces in a merger or acquisition.
Of course, competition in the streaming market is fierce. As a late entrant into the space, ViacomCBS is understandably having a tough time recruiting viewers.
The Real Problem for Cable Content Companies
I think financial reporters and Wall street have paid way too little attention to the huge problem cable providers like ViacomCBS are facing.
As I’ve noted in previous articles about DIS stock, the owners of cable TV channels receive a set monthly fee for each and every cable subscriber. Of course, the deal is far different in streaming. In that realm, content providers only receive monthly revenue from subscribed consumers.
To use a prehistoric comparison, it’s like the difference between a family hunting by themselves versus a family getting a set percentage of the entire tribe’s food. The latter scenario is likely to be much more stable and lucrative than the former.
ViacomCBS reportedly doesn’t break out the financial results of its individual streaming channels. However, based on other companies’ earnings, we do know streaming tends to be expensive and unprofitable.
For example, in May 2020 when the pandemic was in its early stages and streaming was in high demand, Disney saw a considerable loss. “The operating loss of Direct-to-Consumer and International, the unit that includes the streaming services, came in at $812 million in Q2,” I noted at the time.
Indeed, streaming is a very expensive proposition. ViacomCBS sold $3 billion in VIAC stock earlier this year and used some of the funds to beef up its streaming channels. So it’s not surprising that ViacomCBS’s operating income has trended downwards in recent years. It fell from $5.49 billion in 2018 to $4.88 billion in 2019, then dropped to $4.5 billion in 2020.
Additionally, Bank of America believes ViacomCBS’s Q2 operating income before depreciation and amortization (OIBDA) will tumble 28% year-over-year.
The Bottom Line on VIAC Stock
ViacomCBS’s TV and movie businesses appear to be very troubled, and its streaming services can’t keep up with their competitors. Investors should sell VIAC stock.
Those who hold the shares for a short amount of time may profit from a quick rally. A deal between ViacomCBS and Comcast, an optimistic note from an analyst or a strong performance by Pluto TV could cause VIAC shares to rise.
But the important thing is that ViacomCBS is in a troubled sector. VIAC stock’s general trajectory is likely to be downward, and most investors who hold it will see a loss in that case.
Many sectors are booming — e-commerce, cloud software, solar energy, biotech and electric vehicles, just to name a few. In that context, owning a stock in a very weak space like ViacomCBS doesn’t make much sense to me.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.