2023-08-03 15:56:34 ET
Summary
- Paramount Global is cheap overall, but most of the value is unlikely to be realized through any kind of spin-offs or asset sales.
- The company is still surviving off of its legacy media businesses, which are slowly declining. It's effectively making a bet on Paramount+.
- Paramount+ has shown growth in subscribers, but the streaming operation is currently burning cash and needs to prove itself in the competitive streaming market.
- Overall, Paramount+'s growth is driven by the original content created by Taylor Sheridan. Because of its current strategy then, the future of Paramount Global, as a whole, is now reliant on the continued success of this new and increasingly valuable franchise.
Right now, Paramount Global ( NASDAQ: PARA ) looks relatively safe – financially speaking. But the market has taken a different position. Much like the Roy Family in hit show Succession (at a competing media company I’ll add), the market realizes that this is a quintessential moment for Paramount.
It’s been living off of an aging and slowly declining (albeit a cash cow) network media business that generates in excess of $20 billion a year in revenue and just over $5 billion in OIBDA. CBS is still the top cable network, and it’s locked up NFL rights (for a hefty $2 billion a year) until 2033. But it also lost the SEC streaming rights to Disney (but picked up the Big Ten Conference as somewhat of a replacement), and its viewership is decreasing, forcing CBS to spread its growing television rights cost base across a shrinking viewer base.
In the movie business, Paramount Pictures can churn out the odd hit and is still surviving on steady royalties. But it lacks a real enduring franchise like those that Disney, Universal, and maybe now Nintendo have been able to create.
Paramount’s one bright spot of growth has been Paramount+ (in combination with The Paramount Network), which has seen subscribers increase to 60 million as of Q1 2023, with subscriber growth rates that exceeded 50% last year. But the entire D2C streaming operation (Paramount+, Pluto TV, Showtime, Noggin, etc.) is burning cash.
This leads to a dichotomy of sorts for Paramount. Should it fund streaming growth with the cash generated from legacy media operations, even if it may never stake a large position in the global streaming environment or turn an adequate profit? Or should Paramount return cash to shareholders, license content to other companies, sell off non-core assets, break up the company, or even sell to a competitor?
What’s Got the Stock Price Down?
Paramount released negative earnings and a ~1% decrease in revenue in Q1 2023. The loss was related to a write-off associated with the integration of Showtime into Paramount+. Essentially, Paramount analyzed its content portfolio when it combined the entities and determined (on Showtime’s side) that $1.45 billion of content investments were impaired and $225 million of development costs needed to be written off. The company also burned over $500 million in cash during the first quarter. And they are guiding for negative FCF for the full year.
Paramount Global Q1 2023 10-Q
The stock dropped by roughly 28% in one day and hasn’t really recovered since. This leaves it trading at below a $10 billion market cap, but still sitting at a ~$23.6 billion Enterprise Value.
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It’s very possible that Paramount’s profitability could be negative for the year, given that 2023 is expected to be their largest year yet in terms of streaming content spend. A few box office wins could really help them out, but given their current slate, I think it’s unlikely to make too much of a difference (though I will note that the one-time Showtime charge is unlikely to be repeated in future quarters).
So, what’s the deal? What’s the market worried about? Well, the linear TV business (and studio business, to some extent) is still a great cash cow for Paramount, but with slightly declining growth and no way to monetize the assets, the market’s applying a discount. CBS is still the most watched network on TV for the 15 th straight year, despite falling ratings. But the cash flow can’t necessarily last forever. Neilson says CBS averages under 6 million viewers during prime time, compared to close to 12 million back in 2008-09.
Paramount Global Q1 2023 10-Q
Paramount Pictures had a hit with Top Gun; Maverick in 2022 ($1.46 billion gross box office) and will probably do well with the new Mission Impossible , but without a durable franchise (I wouldn’t necessarily call Mission Impossible that popular), the studio results aren’t a sure thing, and they’re not providing the type of growth that can drive valuations. The Film Entertainment segment actually lost money in Q1 of 2023.
Paramount Global Q1 2023 10-Q
Overall, Paramount has the same problem that all of the other consolidated media companies have – it has to figure out what to do with its cash. And like most of them (WBD, NBCUniversal, and even Disney) it has plowed a lot of it into streaming, believing that to be the best way to monetize its IP and grow its audience.
The problem is that Paramount has yet to prove itself in the streaming wars. Paramount+ has been growing fast, but since inception has been considered a mid-tier streaming platform. The market, more or less, considers it to be a money-losing IP drain for older Paramount, CBS, and Viacom content. And with linear TV declining, Paramount Pictures stagnant, and a break-up or buy out all but prohibited by Paramount’s largest stockholder, the market sees the writing on the wall. Paramount+ is the only option for future growth, and Paramount Global is committed to funding it and sticking with it.
But for being such a small streamer, Paramount+ has recently been punching above its weight class. It has a core franchise of originals that pretty much every other streamer out there lacks. And as I’ll show below, the future of Paramount+ likely lies in this original content. And because of this, the future of Paramount Global is largely resting on the shoulders of one man.
Can Taylor Sheridan Save Paramount?
By the end of Q1 2023, Paramount’s D2C streaming platforms had over 63 million subscribers (the vast majority being Paramount+ subscribers). Many other parts of their business, however, including Showtime, have actually shown slowing growth, which mirrors that of the general decline in linear TV.
Paramount Global Q1 2023 10-Q
The Paramount Network, I’m sure, with the recent success of Taylor Sheridan shows, has grown in popularity and subscribers, but it’s still part of the generally declining linear TV landscape. Paramount’s FAST service – Pluto TV – has actually experienced pretty impressive growth recently, reaching over 80 million monthly active viewers in Q1 2023. As successful as it is though, Pluto is primarily a way for Paramount to monetize its older content library (including those portions that aren’t popular enough to be supported on subscription-based streaming), and to staunch the flow of viewers who are leaving its linear TV networks.
Maybe no one wants to say this, but I think the success of the streaming portfolio right now comes down to one man. And that is Taylor Sheridan (creator of Yellowstone and several other TV shows). Obviously, Paramount is shoring up their Paramount+ offering with their library of television and film content, and I think that will help with increasing viewership and maybe even ad revenue. The migration of CBS’s sports offerings to the online platforms may also drive sign-ups and will definitely increase viewing hours.
Town and Country
But, overall, the vast majority of extremely popular CBS and Viacom related IP is still licensed to other networks. And even if Paramount+ retains some streaming rights, many of them aren’t exclusive yet. Just take a look at where you can watch some of the top shows – The Big Bang Theory (Max), Young Sheldon (Max), Southpark (Max), NCIS (Netflix, Roku Channel, and Paramount+), Criminal Minds (Roku Channel, Hulu, and Paramount+), SpongeBob Squarepants (Prime Video, Paramount+, and Fubo TV), and Blue Bloods ( Roku Channel, Hulu, and Paramount+). You get the picture.
Luckily for Paramount+, though, the company does actually have access to blockbuster-level original content – maybe even the most popular original IP in all of television right now. Yellowstone was the only non-sports TV program to reach over 10 million viewers a week in 2022 (fortunately for Paramount, NCIS was also close behind with 9.8 million viewers, but unfortunately for Paramount+, it’s not exclusive). Now, I know what you’re thinking though, Yellowstone itself isn’t exclusive to Paramount+. In fact, it’s exclusive to Peacock – Paramount+ can’t even air it. But its popularity has led to a growing appetite for what seems like the never-ending funnel of TV shows that Sheridan is able to create. Even without Yellowstone , Paramount+ was the most watched streaming service (for TV shows) in Q1 2023, and 1883 was the largest cable premier since 2015.
Sheridan’s growing slate of content is more of a franchise based on a certain type of content – content that appeals to a large swath of the American population. And content that largely hasn’t’ been replicated by any other streamer out there. The Sheridan-Verse, as it’s known, includes the original Yellowstone series, the Yellowstone spinoffs – 1883 and 1923, the unrelated TV series Mayor of Kingstown , another unrelated TV series “Tulsa King,” two new series – Special Ops: Lioness and Land Man , and what is expected to be another Yellowstone spinoff – 6666 .
Much like Netflix, and probably soon-to-be more streamers, Paramount has been paying big bucks to lock down top talent that will hopefully drive a lot of demand for certain shows on the streaming platform.
It was announced in early 2023 that Taylor Sheridan was being paid $500 million a year by Paramount to create his slate of shows. This is similar to deals Netflix has made for Ryan Murphy (now leaving to join Disney) and Shonda Rhymes, with one important difference – Sheridan is a one-man show. He writes the shows, directs them, produces them, and now owns the filming location for many of them. He’s filming many of the shows on his ranch and charging for the use of it, as well as the use of props, horses, etc..
TheWrap/Parrot Analytics reported in December of 2022 that demand for Sheridan’s shows made up ~3% of total demand on Paramount+. This seems relatively insignificant at first, but consider the fact that Yellowstone still isn’t on the platform (they estimate it would add to demand, making the total ~5% of Paramount+). In addition, all of the Star Trek IP that Paramount owns represents 7.9% of the platform’s demand, and competing content from creators Ryan Murphy and Shonda Rhymes combined only represented 1.9% of Netflix’s total demand.
TheWrap
TheWrap has also reported that Paramount+ (and mainly Sheridan’s output) has ranked in the top 10 in weekly viewing polls more than any other streaming service in Q1 2023, even Netflix and Disney.
TheWrap
The Mandalorian itself had the most number 1 finishes, but Disney+ was still behind Paramount+ overall in the rankings.
It’s hard to say why people sign up for a streaming service in the first place. But, I think the best answer is a service will have to (1) offer a wide variety of familiar content, and (2) offer something that people can’t get anywhere else. In Paramount’s case, it’s got the Sheridan originals (minus Yellowstone itself at the moment). Management has even noted, for example, in their Q4 2022 Earnings Call , that a franchise (like what Sheridan has created) is essential to growing their streaming platform:
Second, we will drive towards profitability by continuing to efficiently manage our content spend. By far, our biggest lever to manage spending is to focus on franchises. The higher levels of consumer awareness and built-in fan bases associated with this IP drives strong subscriber acquisition volume, lower acquisition costs, lower churn, and extend LTVs. Put simply, franchises give the people what they want.
We see this with Paramount Films, with CBS series with the Taylor Sheridan universe, with Nick's Kids product, and more. And while we will of course continue to take selective swings on new IP, there's no question that franchises are a powerful advantage.
Source: Paramount Global Q4 2022 Earnings Call
In fact, the creation of IP franchises is considered by Paramount to be the most important lever in keeping overall content costs under control (and actually in decreasing them).
Even if people only spend less than 4% of their time watching these shows, I think they’re what leads a lot of them to give Paramount+ $10 or more a month. Viewers can watch the other content – filler content – for the majority of their day, but they can get the vast majority of this content on another streaming platform as well. They can’t get the Sheridan shows anywhere else (except Yellowstone for right now, of course).
The overall take-away from this is not that the investment in Sheridan is too expensive. Far from it. Even though Paramount+ is losing money, I think it’s getting far more value per dollar spent at the moment than the vast majority of streaming services out there. Netflix has to fund a hundred duds to get one hit, but Paramount has found its golden goose. $500 million a year is worth getting 40, 50, or 60 million more sign-ups over the next couple of years. As I mentioned above, an enduring franchise pays for itself many times over – it reduces churn, reduces the need for a lot of advertising, and reduces risk/content costs (you can keep airing it or create spinoffs that you are more sure will be successful).
The one issue with this is that Paramount may have the biggest case of key man risk out of any company in the media industry. And, unfortunately for them, it’s not in the C-Suite, it’s in the talent that they’re hiring. Talent that could, one day, choose to go elsewhere.
What Is the Market Pricing In?
Let’s be clear, continued subscriber growth is definitely far from a sure thing for Paramount+. Given the overall cloudy streaming market outlook in 2023, and the recent price increases, we may be seeing a serious slow-down in subscriber growth over the coming months and year.
But the fact is that the company is cheap. The Adjusted OIBDA is around $3.7 billion, so the company’s currently trading at an EV/OIBDA of 7x. It just cut its dividend, announced that it’s cutting costs, selling off assets, and shoring up its expense base.
Streaming has grown to over 60 million subscribers and over $2.7 billion in revenue in a matter of three years. I don’t know if it can continue at this rate, but it’s not really showing any signs of stopping.
The problem is that it isn’t profitable. Paramount’s management has said repeatedly on earnings calls and at conferences that they’re striving to make the streaming segment profitable by 2024. They recently raised prices from $9.99 a month to $11.99 a month, which will help, but it’s still a long way from replicating the profitability of network TV (which they have said they’re trying to do). Implementing advertising will also help (a lot, I think), but at the moment, let’s leave that out of our valuation.
The company grew subscribers by 70% and 41% in 2022 and 2021 respectively. Given this massive growth – some of the best out there – and Sheridan’s ever-growing slate of content, I think it’s fair to assume that subscribers could grow at around 30% going forward (for at least a few years).
Given this growth rate, I think Paramount+ could hit 100 million subscribers by 2024 or 2025 – the year the company predicts the service will be cash flow positive. Right now, Paramount+’s ARPU is just under $50 a year ($4.12 a month). This obviously takes into account new sign-ups that haven’t yet contributed to a year of profitability. But, more importantly, I think it illustrates how much Paramount+ relies on partnerships for growth. By comparison, Netflix’s ARPU per month is $11.42, almost triple that of Paramount+. So, it’s obvious that, at the moment (without advertising), Paramount+ doesn’t have customers that are as profitable as Netflix’s (on a per user basis).
Since Paramount+ is raising the monthly price in mid-2023, I’m going to assume that it may be able to capture ~$6 a month from each customer going forward. Applying this to 100 million subscribers in 2024 or 2025 would give Paramount+ $7.2 billion in revenue. Will it be profitable at this point? Maybe.
Paramount has previously guided for $6 billion in D2C content costs by 2024. However, the CFO noted at a February conference that the $6 billion assumed that Showtime and Paramount+ remained separate, and won’t take into account costs savings associated with the merger. Essentially, the content spend will most likely be lower.
How much lower? We don’t know. Paramount also guided for $9 billion in revenue for its D2C segment in 2024. This is a little ambitious, but definitely in the realm of possibility. It’s difficult to break out overhead for Paramount+ itself, but given content spend could still be say $5 billion, it would make up 69% of total 2024E revenue if it has 100 million subscribers and 55% of revenue if it somehow gets to the predicted $9 billion in revenue.
Given the fact that it’s never turned a profit, I think it’s unlikely that Paramount+ will be cash flow positive in 2024. It could reach profitability in 2025 though, especially if subscriber growth continues. Regardless though, I will say that the market isn’t really pricing this possibility in. Even if Paramount+ is only able to generate $300 million FCF (on $7.2 billion in revenue, that’s a margin of 4.1%), that segment of the business alone could be worth around $7.5 billion (I’m assuming a pretty hefty multiple of 25x given the past and expected growth).
If it continues to grow its subs and its margins, I’d expect it to be worth a good bit more than the entire company combined. It’s hard to realize this value though, when the business is weighed down by a shrinking linear TV business. But, then again, that’s Paramount’s most profitable segment, and streaming has yet to bring in any cash.
Value of the Business
But what about the rest of the business? I really hate sum-of-the-parts valuations. They are the definition of a value trap in my view. They provide the illusion of value without actually allowing shareholders to realize it. And with Paramount, I’m afraid that’s what we might have here.
Now, let me be clear – Paramount’s management has said that they’re open to consolidation (in either form), so they are open to selling portions of the business. But think about it for a second. If Paramount does sell off Paramount Pictures, some of the legacy cable networks, or even CBS, it could probably get a pretty good price (even if the ice cube is melting). The linear TV business in total produced OIBDA of over $5 billion in 2022. Apply a 5x multiple to that and you’ve got a $25 billion valuation alone. Paramount could sell that segment, pay off its debt, and be left over with cash worth its current market cap ($10 billion). So, what’s not to like?
Well, what would happen to Paramount+ if Paramount sold off any of the legacy business? Would they be able to retain the streaming rights to that content? As great as Taylor Sheridan’s content is, the service is still mostly comprised of legacy Paramount content. Paramount needs that content to keep the streaming services alive and growing. Right now, they’re benefiting from both the ability to share the IP with Paramount+ internally at no cost and the ability to generate additional revenue by licensing that content to third parties.
And Paramount has been pretty clear that it’s focusing on keeping its core IP in-house and growing into the television company of the 21s century – which, in its mind, means streaming. Yes, it will continue to license films and its content library out to other platforms in order to generate income, but I think the more likely scenario is that the company starts to consolidate IP into its Paramount+ offering. As its licensing deals with third parties start to run-off, Paramount is likely to keep some of its more popular content (like the shows I mentioned above) in-house and air it exclusively on Paramount+ or Pluto TV.
This is the opposite of a break-up or spin-off, and I think it’s the more likely scenario. But this doesn’t mean that Paramount won’t sell off some non-core assets. It’s floated the idea of selling Simon & Schuster as well as BET and the kids’ streaming service Noggin (which airs a lot of content developed by Nickelodeon). I could also see the company entertaining offers for other assets like VidCon, Bellator (unless it wants to use this to shore up its sports offering), and even its stake in FuboTV.
If consolidation is an option here, I think the most likely outcome is that the company is sold outright or doesn’t really sell any core assets. It’s cheap enough (why else would Berkshire own it) and another media company probably wants some of the assets that Paramount Global owns. I could see the controlling shareholder – National Amusement – selling the entire company and just getting out. But I don’t see Sheri Redstone selling off pieces of the company that her father created and she and her father fought to join back together. A break-up may not be in the cards, but an all-out acquisition could be.
For valuation’s sake, though, let’s look at what Paramount Global could be worth to a potential buyer. To me, seems pretty clear that Paramount could be worth 2x what it is today – $25 billion or so for legacy linear TV, $7.5-$8 billion for streaming (if it can produce 4% margins), and $2-$2.5 billion for film (8x $272 million in OIBDA in 2022). This would give the company an enterprise value of $34.5 billion, which would give an implied market cap of ~$21 billion after you subtract net debt of ~$13 billion. And this is honestly a pretty conservative valuation. The TV media assets could be worth more than 5x OIBDA, and MGM sold to Amazon for $8.5 billion (~28x EBITDA). Is it reasonable to assume that Paramount Pictures could get a similar deal? Maybe not reasonable, but it’s possible. Higher valuations are definitely something to keep in mind if the right buyer ever did come along.
But like I said, a break-up isn’t really in the cards and a total sale may be hard to pull off. Right now, the dividend has been cut, it’s unlikely share buybacks will increase, the company may sell off some non-core assets and pay down debt, and the focus is going to be on growing the streaming platform. So, if you’re holding the company today, it’s still essentially a bet on Taylor Sheridan. If Paramount+ can grow and become profitable (likely with the help of higher prices as well as advertising on the platform), Paramount Global could be worth a whole lot more in the future.
For further details see:
Paramount Global: Betting The Farm On Streaming