Shares of ViacomCBS Inc. (Nasdaq: VIAC) traded 50% lower last week, leading to jubilation among bearish investors who have complained about valuations … but they might want to put the celebration on hold.
Some of the recent selling is the result of forced liquidation, according to a report from Bloomberg. Sources say the hedge fund Archegos Capital received a margin call on Friday that it could not meet.
With the selling pressure removed, shares should bounce back smartly this week.
If this comes to pass, it will be only the latest in a series of setbacks for bears. Although technology and media shares are well off their February highs, most are still up sharply during the last year. ViacomCBS is still up 245% from a year ago.
What bearish investors are missing is a dramatic reset in valuations. Many parts of the global economy are in the midst of digital transformation. The best business managers are using data and digital infrastructure to reimagine their business models. And they are being rewarded by investors with higher share prices.
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The Walt Disney Co. (NYSE: DIS) is a perfect example. Despite nine consecutive quarters of declining sales, Disney shares are up 75% year over year on the basis of growth at Disney+, its newish subscription video on demand (SVOD) service. SVOD is a big change for the House of Mouse, a brand built on theme parks, blockbuster movie ticket sales and payments from cable-TV operators for ESPN. The focus on streaming recharged the business. It also brought a valuation reset.
ViacomCBS managers are following a similar path. Paramount+, its new SVOD, offers shows from CBS, Showtime, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, Paramount Plus and Pluto TV. These are valuable brands with loads of digital media content. As recently as a week ago, shares were worth $100 apiece. On Friday, the stock bottomed at $40.73 before recovering to close the week at $49.51.
The oddity is managers announced on Tuesday a secondary offering of 23 million shares priced at $85. An additional 10 million shares were offered at $100 through a convertible preferred.
Importantly, this means managers convinced institutional investors to pay at least $85 for ViacomCBS shares even after the stock had run up more than 500% since last May. Pros validated the price.
The decline Friday wasn’t those investors resetting the price. It was the effects of an unforeseen deluge of shares coming onto the market all at once.
Bloomberg notes that prime brokers were offering the stock in size Friday afternoon. The Goldman Sachs Group, Inc. (NYSE: GS) sold a 30-million-share block of ViacomCBS. And Morgan Stanley (NYSE: MS) offered 15 million shares of Discovery, Inc. (Nasdaq: DISCA), another hot SVOD. Similar large blocks of Baidu, Inc. (Nasdaq: BIDU), Tencent Music Entertainment Group (NYSE: TME) and Vipshop Holdings Ltd. (NYSE: VIPS) were also shopped around. The common denominator is Archegos Capital, a highly leveraged hedge fund run by Bill Hwang.
Archegos was set up as a family office to trade the personal wealth of Bill Hwang, an alumnus of Julian Robertson’s highly respected Tiger Management family of hedge funds. Hwang was a rising star within Tiger until a fund he was managing became embroiled in a Hong Kong insider trading scandal. Security and Exchange Commission filings show he admitted to wire fraud and paid a $44 million fine.
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Although it is impossible to know if Archegos will sell more shares, ViacomCBS stock is due for a mighty bounce. Pros have already bought into a secondary at $85 and $100 per share, respectively. They see value at those price points. Bearish investors face an uphill battle convincing them otherwise.
ViacomCBS is a perfect example of business managers correctly embracing digital transformation and creating shareholder value. They remade a traditional paid media business into an SVOD company, with all of the higher valuation perks that the sector affords.
Shares now trade at 11.3 times forward earnings and 1.6 times sales. Netflix, Inc. (Nasdaq: NFLX) shares fetch 39.1 times earnings and 8.9 times sales. Given that subscriber growth for ViacomCBS — the key SVOD metric — should be much quicker in years ahead, shares seem cheap.
Longer-term investors should consider using current weakness to buy shares.
Best wishes,
Jon D. Markman
