What's Driving ViacomCBS Stock to Jump?

Trevor Noah, CEO of Viacom Robert M. Bakish and Sherri Redstone attend as  ViacomCBS Inc. - Getty -H 2020
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Wall Street analysts highlight surging streaming platform usage and an expanded distribution deal with YouTube Live.

Since the ViacomCBS recombination closed in December, the company's stock has often struggled amid Wall Street doubts that the merger can create much value given the secular challenges the industry has faced. And that was before the novel coronavirus pandemic.

But shares in ViacomCBS surged Thursday to close just over 10 percent higher than the day's opening price (up $1.54 to $16.42), after earlier trading as much as 17.5 percent higher.

The leap in stock price came despite the company reporting, before the market open, a 6 percent revenue and 22 percent adjusted net earnings drop for the first quarter, with advertising revenue down 19 percent and an even bigger pandemic-driven ad hit expected in the current second quarter.

So what happened? ViacomCBS shares closed Thursday following the announcement of the first-quarter earnings and an expanded distribution deal with Google's YouTube.

The combination of better-than-expected first-quarter financials; a newly announced expanded distribution deal with YouTube that will bring channels like MTV, BET, Comedy Central, TV Land and Nickelodeon to its YouTube TV service; and the streaming boom caused by the novel coronavirus pandemic all impressed investors (Viacom said April was its streaming platforms' "best month" ever).

On Thursday's earnings conference call, ViacomCBS CEO Bob Bakish described the latest results and the YouTube deal as proof that the Viacom-CBS recombination — which now includes the CBS network, the MTV and Nickelodeon cable channels, the Pluto ad-supported streamer and Paramount Pictures — was bearing fruit.

Wall Street observers took note of the stock's big gain Thursday and shared their latest thoughts on the company's current performance and future outlook.

"The expanded pact with YouTube, which for the first time includes Viacom’s legacy channels, was an unexpected welcome development," CFRA Research analyst Tuna Amobi tells THR. "Also, the streaming stats, and guidance, were quite strong, apparently benefiting from a spike in demand and user engagement in the wake of COVID-19."

Wolfe Research analyst John Janedis, who has been more bullish on ViacomCBS than others on the Street and has had an "outperform" rating on the stock, in a report noted that there has been investor concern about the attractiveness of the firm's networks for distributors and its ability to strike broad-based carriage deals with them.

"ViacomCBS delivered a solid beat across the board, and when combined with this morning’s long-awaited deal with YouTube, part of the overhang on the distribution narrative should be lifted," Janedis concluded after the earnings update.

But Dish Networks chairman Charlie Ergen wasn't as convinced of ViacomCBS' attractiveness for distributors when he discussed his own carriage agreement with the conglomerate, which is up for renegotiation later this year.

"From a ratings perspective or viewership perspective, [ViacomCBS has] had declines over the last several years. A lot of their investment has gone into Pluto, and that's free. ... There's a reality out there of where the market is. And it's probably not the same as in years past," Ergen said Wednesday during his own analyst call.

At the same time, UBS analyst John Hodulik highlighted "stronger cost containment" and said the Youtube TV deal came "earlier than expected," estimating that it covers 2 to 3 percent of U.S pay TV subscribers. Evercore ISI's Vijay Jayant called the YouTube news "a nice earnings surprise."

"YouTubeTV further stuffs the bird," Bernstein analyst Todd Juenger echoed in the title of his Thursday report. "First-quarter results were better than feared," he explained. "Of course, that's before the pandemic decimated advertising and cord-cutting. But none of that matters today. The important news is YouTube TV adding 14 Viacom cable networks. ... This brings ViacomCBS closer to an equivalent distribution footprint as its peers, although it is still less represented on or absent from some important services, notably Hulu Live."

Also on the streaming front, ViacomCBS' CBS All Access online platform said Wednesday it will add around 100 movies from Paramount Pictures’ library, including classics like The Godfather, Terms of Endearment and An Inconvenient Truth, as the media player continues to spread its catalog of IP across ViacomCBS properties. 

But Bernstein's Juenger continues to have doubts about ViacomCBS, which he rates at "underperform," and its outlook, writing: "Investors will rightly question the terms. We certainly expect this unexpected news to reset the stock at a new, higher level — but from there it still faces the same fierce structural headwinds on viewership and subscribers as everybody else."

Cowen & Co. analyst Doug Creutz similarly had a good-news, bad-news takeaway. "The company is seeing strong domestic streaming and digital revenue trends as a result of shelter in place," he wrote in a report maintaining his "market perform" rating on the stock. "However, the company remains significantly exposed to the challenging advertising environment."