ViacomCBS Can Rise 55% If Q3 Earnings Show Strong Free Cash Flow

Investors in ViacomCBS (NASDAQ:VIAC) will be watching the company’s third-quarter earnings release on Nov. 4 to see how well its free cash flow (FCF) performs. This could have a major effect on the VIAC stock price.

That could not happen at a better time, since the stock is at a six-month low. Since June 28, when VIAC stock peaked at $46 per share, it has drifted lower to $37.51 as of Oct. 22. That represents a drop of 18.5% from its peak.

However, the stock is essentially flat year-to-date, as it ended 2020 at $37.26. But this is after it spiked to an incredible height of $100.34 and subsequently cratered after Archegos Capital Management’s bets on the stock unraveled. At the time, the company did not know why VIAC stock had spiked, but they were able to take advantage of it and raised $3 billion in equity capital.

Free Cash Flow Expectations

As I indicated on Sept. 20, the media company needs to show it can produce large amounts of FCF. Its Q2 FCF came in below analyst expectations at just $75 million compared to $1.589 billion in Q1.

However, analysts now expect revenue to hit $6.58 billion in Q3 according to Yahoo! Finance, which uses Refinitv analyst survey data. That is 7.6% over last year’s $6.116 billion in revenue, but about flat with its Q2 revenue of $6.564 billion.

So hopefully this coming quarter’s revenue comes in higher than analyst forecasts. That way, the company’s FCF could end up being higher than it was last quarter.

One major factor that will affect revenue growth will be ViacomCBS’s global streaming revenue. Last quarter it was up 92%, but streaming still represents just $983 million of its total Q2 $6.564 billion in revenue.

Streaming revenue includes both subscription and advertising revenue on ViacomCBS’s platform.

I suspect management believes that in the long run, streaming income can become its dominant form of revenue. But for now, its growth is still highly dependent on its main-platform advertising revenue, which reached $2.097 billion in Q2, and its affiliate revenue, which was $2.107 billion.

However, there is one glimmer of hope for ViacomCBS. Revenue from film licensing and other sources was down $701 million, or 36% YOY, last quarter due to Covid. This is likely to be much higher this coming quarter as well as in Q4.

This, in fact, could make all the difference in terms of higher free cash flow for the quarter. However, it also depends on how much the company has to spend on picking up more subscribers and investing in new film and TV content. That is exactly what lowered its cash flow last quarter, according to management.

Where This Leaves VIAC Stock

Most analysts on Wall Street are fairly positive on VIAC stock. For example, Seeking Alpha indicates that 27 sell-side analysts have an average price target of $51.10. This is 36.2% over its price of $37.51 per share as of Oct. 22.

That is also close to the Refinitiv analyst survey data as seen on Yahoo! Finance. They report that 27 analysts have an average target price of $51.26. Furthermore, Marketbeat says 21 analysts have an average price target of $48.86.

But TipRanks indicates that eight analysts who’ve written on VIAC stock in the last three months forecast $62.63 per share.

In my last article, I wrote that VIAC stock was worth $57.99 based on a 6.5% FCF margin and a 5% FCF yield. That represents a potential upside of 54.6%. I am willing to stick with that forecast now, especially since it made a 21.4% FCF margin during Q1.

At this point, it probably makes sense to wait and see what will happen on Nov. 4 with ViacomCBS’s earnings release. As I said before, most analysts will be looking at both the top line and its free cash flow production. They will also be paying particular attention to the growth in revenue from streaming services.

Nevertheless, over the long term, it looks like VIAC stock is undervalued given the earnings power of its underlying assets. So, if the stock falls after the earnings release, that could also be a good time to average cost into the shares.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.