2023-04-26 08:02:08 ET
Summary
- Paramount operates several successful entertainment properties, but its Direct to Consumer segment continues to struggle.
- It's unclear how long it will take Paramount to achieve profitability in its streaming businesses.
- A valuation gap exists between Paramount and peer companies, which we believe presents a risk.
Overview
The flashy business of media can be a fickle thing--predicting what series or movie will generate mega-profits is notoriously difficult. The industry mega-trends of streaming content, consumer cord-cutting, and the slow death of the traditional theater release, however, has hit companies within the industry more or less similarly as executives scramble to successfully operate fledging streaming services and capitalize on content catalogs.
Paramount ( PARA ) is a big fish in a pond of other big fishes, competing with Fox ( FOXA ), Warner Bros. ( WBD ), Disney ( DIS ), and Netflix ( NFLX ) to name a few. In this article we'll cover Paramount's business and what we believe its future prospects to be at these price levels. Let's dive in.
A Strong Legacy
The media business is one that favors consolidation, and investors approaching Paramount for the first time could be forgiven for not knowing the extent of its content catalog aside from the eponymous movie studio productions.
The company operates in three segments (ranked here in order of revenue): TV Media, Direct to Consumer, and Filmed Entertainment. TV Media consists of networks such as CBS, MTV, BET, Nickelodeon, and Showtime. Direct to Consumer contains the company's streaming offerings like Paramount+, BET+, Showtime's streaming offering, and Pluto TV. Filmed Entertainment comprises the company's movie offerings, which had a number of box-office wins in 2022 including Top Gun: Maverick , and Sonic the Hedgehog 2.
With revenues of $30 billion in 2022, Paramount is a legitimate competitor in the space, even if the name may not immediately conjure up its associated brands in investors' minds.
The Streaming Wars
Arguably the most closely watched segment of the company is Direct to Consumer (hereafter DTC), which boasted a little more than 77 million subscribers to its various properties and generated $1.3 billion in revenue for Paramount in 2022.
The only problem--which seems to be common among fledgling streaming services--is that its unprofitability only seems to grow as the top line increases.
In its press release for its full-year earnings ending 2022, Paramount reported that its DTC operations pulled in $4.9 billion in revenues for the year, a full 47% more than it grossed in 2021. Bottom line losses, however, were quite a bit higher, expanding a whopping 83% to $1.8 billion.
These losses are staggering, but not exactly surprising. DTC has been an incredibly tough nut to crack for several companies with, arguably, more valuable content catalogues than Paramount. Disney's struggles to make Disney+ profitable have been well documented, for example.
The company is making moves, however, to wrangle costs in. The Wall Street Journal recently reported that the company plans to fold in Showtime with Paramount+ and rename the service as Paramount+ With Showtime. Management also noted that price increases for this new streaming service would be introduced in 2023.
Paramount is also reported to be exploring sales of majority stakes in both Noggin (the platform for the popular children's show Paw Patrol ) and BET.
These changes, however, are unlikely to close the profitability gap in the near-term, with management setting expectations on the earnings call that Paramount overall would be cash flow negative in 2023.
Valuation & Looking Ahead
Given the massive challenges faced by Paramount in bringing its streaming business to profitability and the overall losses incurred by the company in the fourth quarter of 2022--which are expected to continue for at least the near term--one might be surprised to learn that the company trades at a premium to peers Warner Brothers and Fox.
Indeed, on a forward EV/EBITDA basis, Paramount trades at 11.8x forward EV/EBITDA, while Warner Brothers and Fox trade at 7.3x and 7.4x, respectively.
The reason for this disparity is unclear. Warner Brothers, possibly the closest comparison, has higher debt to capital (51% versus Paramount's 42%), but in our minds the difference isn't enough to justify such a large gap in valuation.
Also unlikely to us is the possibility that the market is assigning a premium to the company's having a controlling shareholder in National Amusements, the company formerly controlled by the late Sumner Redstone (now operated by Shari Redstone, Sumner's daughter). It could be, however, that given the trend of consolidation that has run rampant through the media industry over the past several years, that the market believes that the presence of a controlling shareholder could smooth the process of any large-scale combination; but this, again, seems unlikely to us.
Wall Street also appears to lack bullish conviction around Paramount's longer-term revenue prospects (which are critical for the company to achieve the scale needed to operate Paramount+ profitably). Since mid-2022, average analyst estimates for revenue looking out for the next four years have been slowly grinding downward.
The Bottom Line
With analysts not expecting major growth from the company along with negative near term guidance from management on the most recent conference call , we can find little reason to be excited about the near-term prospects for Paramount. The company's elevated valuation also presents a risk, in our eyes, since it is not obvious to us why such a gap exists.
Risks to our thesis are a major M&A move by the company, or an unexpectedly high user growth rate in the company's streaming services. However, the specter of a possible recession on the horizon and consumers potentially looking for ways to reduce household expenses has us negative overall on Paramount today.
For further details see:
Why We See Risk In Paramount At These Levels