The streaming wars have only just begun, and investment spending for new content win subscribers may hit new highs in 2023. Buying or producing more and better content to show subscribers is a very expensive proposition, but these increasingly numerous streaming companies have to refresh content constantly or else risk a high churn-off of subscribers.
One of the players in this space is Paramount Global (PARA, Financial). Formed by the merger of Viacom and CBS, the company’s portfolio of brands includes CBS, Paramount Pictures, Paramount+, Pluto TV, Showtime, MTV, Nickelodeon, Paramount Network, Comedy Central, BET, VH1, TV Land and other international broadcast networks.
The company has a history dating back to 1927, when CBS was founded. Paramount Global expects to generate over $30 billion in revenues this year and currently has a market capitalization of $14.1 billion.
Strategy
Paramount’s primary strategic objective is to grow its direct-to-consumer (DTC) business. Paramount+ was only launched in 2021, and global subscribers have grown at a strong rate to reach 55 million as of this writing. However, the company is still considered a small player in the steaming world competing against entertainment giants like The Walt Disney Co (DIS, Financial) and Warner Bros. Discovery (WBD, Financial).
Thus, Paramount needs to step up its game. The company believes it has the financial firepower to compete, so 2023 is expected to be a negative free cash flow year as it invests heavily in streaming. The company has outlined a long-term path to profitability for its streaming segment, and this year is expected to be the peak of investment spending.
Sale of BET
The company has some valuable assets it may be able to sell off to reduce debt and invest in the DTC segment. One of these that the company is rumored to be looking to sell is BET Media Group. According to The Wall Street Journal, actor and producer Tyler Perry has shown interest in purchasing a stake in BET Media Group, which includes cable channels BET and VH1. Perry, who has a current deal already with Paramount, is already a minority stakeholder in streaming service BET+.
The company recently announced it will be merging its Paramount+ and Showtime streaming services into one offering called "Paramount+ with Showtime" and continues to look to greater integration of its linear cable television channels and its streaming offerings to offset growing cord cutting trends and streaming losses.
Financial review
The company recently reported fourth quarter and full year 2022 financial results, which showed revenues increasing 2.0% year over year in the quarter and 5.0% for the full year. The direct-to-consumer (streaming) segment grew 30% in the quarter and 47% for the full year. Global DTC subscriptions rose to approximately 77 million at year-end with Paramount+ comprising roughly 72% of those subscribers.
Operating income before unusual items was $491 million in the quarter and $2.9 billion for the full year. In 2022, the company reported a direct-to-consumer loss of roughly $1.82 billion as it continued to invest in marketing and content.
The company noted in its earnings report, "We're focused on the path to profitability, which has always been part of the evolution that we knew we had to execute against. We have said for quite some time that 2023 will be the year of peak investment in streaming for Paramount."
Cash and equivalents totaled $2.9 billion and total outstanding debt was $15.9 billion. The company’s leverage is four times trailing 12-month Ebitda, but that is expected to increase in 2023.
Valuation
The company trades at elevated price multiples at the moment, largely due to heavy investment in the steaming division. The forward price-earnings ratio is 21 based on earnings per share estimates for 2023 from Morningstar (MORN, Financial), and the price-to-Ebitda ratio is 16. Analysts are expecting EPS to normalize in 2024, so the stock trades at 13 times Morningstar's projections of 2024 earnings.
The GuruFocus discounted cash flow (DCF) calculator gives a fair value estimate that is 20% higher than today's price when I plug in an EPS starting point of 2024's earnings estimates, a long-term growth rate of 8.0% and a discount rate of 10%.
The average price target by 11 Wall Street analysts that cover the company is $23.67, with a high target of $32.00 and a low target of $13.00.
BofA Global Research uses a sum-of-the-parts calculation to derive a price target of $32.00. The largest valued asset is the CBS network with its valuable sports franchises, which is valued at $14-$15 billion.
The company pays an annual dividend of $0.96, which equates to a 4.48% dividend yield currently.
Guru trades
Gurus who have purchased Paramount Global stock recently include Murray Stahl (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio). Gurus who have sold out or reduced their positions include Tweedy Browne (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio).
Summary
Paramount Global appears to be undervalued at this time in my opinion, particularly on a sum-of-the-parts basis. The company will likely execute on its strategic shift to streaming, which could ignite earnings growth in 2024 and beyond. Target asset sales could reduce debt to more manageable levels, which would provide more opportunities for free cash flow growth.
