2023-12-10 08:30:00 ET
Summary
- Paramount Global stock has surged nearly 65% from its recent lows through its recent highs, outperforming the S&P 500 significantly.
- Speculation of a change in ownership has fueled the recent upside in PARA's stock. The involvement of Shari Redstone has also lifted the possibility of a sale.
- The deal's structure remains uncertain, with Skydance emerging as one of the front runners of the deal.
- I argue why my bullish thesis, predicated on a mean-reversion opportunity, has played out accordingly.
- I also explain why it's time to move back to the sidelines, allowing the surge and news to play out before I reassess another opportunity.
My bullish thesis on Paramount Global ( PARA ) has finally worked out, as PARA outperformed the S&P 500 ( SPX ) ( SPY ) significantly after bottoming out in late October. Accordingly, PARA surged nearly 65% from its recent lows through last week's highs, stunning the bearish PARA investors. These investors would likely point out that the spike is not expected to be sustainable or PARA is merely in a bear market rally.
However, astute investors know that we can even take advantage of opportunities that may appear bearish when considering the long-term outlook in their fundamentals or price action. I first upgraded my call on PARA in July 2023. That proved early, as PARA continued to fall. However, PARA's recovery through its highs this week has helped that upgrade outperform the SPX since then. It was based on a mean-reversion setup, meaning I didn't expect the long-term downtrend to reverse yet, but an attractive risk/reward setup presented itself for investors to partake in.
I then upped the ante in mid-September, arguing that PARA was on the " verge of peak pessimism." I urged investors who added to sit tight and ride the volatility as PARA sellers capitulated. Again, while PARA continued to fall through its October lows, the sharp reversal over the past six weeks justified my thesis that PARA was indeed at peak pessimism. In other words, when a stock reaches highly pessimistic levels, a little excitement could spur buyers to return aggressively and attempt to chase further upside, anticipating potential gains. What could that be?
The recent news over the past few weeks has bolstered the possibility that PARA could have a change in ownership. Over the past week, it was reported that " David Ellison's Skydance Media is mentioned as considering the purchase of Paramount's assets." However, that couldn't have fully explained the upside over the past six weeks, as most of the recovery occurred before last week. Therefore, I believe investors have already anticipated changes are afoot in early November 2023, as they bought the dips in PARA aggressively.
Keen observers should note that Paramount Global initiated a change in the executive compensation plans in early November. The plans allowed some of Paramount's top leadership to receive significantly enhanced compensation " if they lost their jobs or resigned due to a sale or merger of the company." That likely ignited the speculation that PARA could be in the early stages of a possible change in ownership. The recent reports suggesting that Shari Redstone's team is engaged in discussions have bolstered the possibility of a sale. With Redstone controlling 77% of Paramount Global’s Class A (voting) common stock through National Amusements, investors are likely betting that the recent news regarding a potential sale of PARA is significant enough to warrant attention.
However, the deal's structure remains fluid, suggesting that Skydance might focus on acquiring Paramount's studio assets. In other words, Skydance might consider monetizing the Linear TV assets in Paramount's portfolio, given their secular decline. Wells Fargo analysts also indicated that Skydance would " discontinue " Paramount's streaming assets, corroborating that Paramount will unlikely continue in its current form with an ownership change.
Based on a sums-of-the-parts valuation analysis of PARA, nearly 74% of its valuation is attributed to Paramount's TV assets. DTC comprised about 22%, and studios comprised just 4.5% of its valuation. With PARA still assigned a "B" valuation grade by Seeking Alpha Quant, I believe it indicates that PARA isn't priced aggressively despite the recent surge.
Therefore, the market has likely not priced in a confirmed sale or re-rating in Paramount's assets. In addition, the discounted valuation has also likely embedded higher execution risks of divesting Paramount's assets, given the secular decline. With legacy media shifting to streaming while focusing on cutting costs, it remains to be seen who could emerge as the buyer of Paramount's assets.
Moreover, the regulatory framework could be challenging to maneuver, given Paramount's market leadership. If anything, the assets might have to be broken up, but how they could proceed is highly uncertain. Big tech players such as Apple ( AAPL ) and Amazon ( AMZN ) could be considered buyers of Paramount's streaming assets. Apple's reported early-stage talks with Paramount on bundling their streaming offerings indicate a potential move to consolidate their market prowess. Therefore, it does suggest that Apple could be interested in subsuming Paramount's streaming assets if they were up for sale at an attractive valuation.
Furthermore, Apple isn't a streaming leader and could face less intense regulatory hurdles in integrating Paramount's assets. Despite that, the counter-argument is that Apple already has a massive consumer ecosystem as the gatekeeper of the iOS walled garden. Hence, the visibility of getting a potential deal through isn't straightforward and could face resistance from peers and the FTC.
"The trend is your friend until it ends." PARA's medium-term trend bias is still pointing downward. However, that doesn't mean astute price action investors cannot capitalize on potential mean-reversion opportunities as they present themselves over time.
However, as seen above, catching PARA's falling knife over the past three years has been a highly challenging endeavor. Investors must be "dexterous" and alert when PARA reverts to its long-term moving averages.
With PARA well above the optimal buy zones from its November peak pessimism, I assessed it's time to be more cautious for investors who have not added exposure. Investors need to watch the $17 level closely as it is expected to be a stiff resistance zone that PARA must overcome decisively to break its downtrend bias.
With that in mind, it's time to head back to the sidelines as I await another opportunity on PARA. Holders in PARA should note that I've yet to glean any red flag (sell signal) at the point of writing. However, given its downtrend bias, investors should focus on cutting exposure when presented with a sell signal, particularly if they are sitting on significant gains from its November lows.
Rating: Downgraded to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Paramount: Potential Sale Rumors Spurred A Massive Recovery (Rating Downgrade)