Paramount Global (NASDAQ:PARA) has been on a bumpy ride over the last year. With earnings turning negative and the company competing for market share with much larger entertainment firms, shares are down over 40% in the last year.
At the same time, the company is building a successful streaming service, navigating box office challenges and regaining its footing when it comes to earnings.
So, is Paramount stock a buy or a particularly tricky value trap?
Paramount+ Is Finding Success in Streaming
In Q3, Paramount+ showed strong growth. Revenues rose 61%, while average revenue per user climbed 16%.
The service also reached 63 million total subscribers, and overall viewing hours between Paramount+ and PlutoTV rose 46%.
Paramount even demonstrated that it has a decent amount of pricing power, having successfully raised the subscription cost of Paramount+ while continuing to add new subscribers.
The Rest of the Company Is Turning in Solid Results
Even though Paramount+ is the largest growth catalyst for the company at the moment, it’s important to acknowledge that the rest of the business is also continuing to expand. Total revenues rose 3%, a modest but positive growth rate that the company will likely be able to sustain.
One of the company’s best showings outside of streaming was in its filmed entertainment segment. Total revenue from films rose 14%, including a 63% spike in theatrical revenue. Paramount also drastically increased its efficiency by paring back expenses in filmed media by 27% during the quarter.
This performance speaks to one of Paramount’s largest assets, which is its stable of valuable intellectual properties. Q3’s theatrical revenue was substantially bolstered by new films from the Mission: Impossible and Teenage Mutant Ninja Turtles franchises.
It’s worth noting, though, that execution matters as much as intellectual property ownership. Paramount’s theatrical growth has occurred at the same time that Disney, with an even larger base of properties, has struggled to produce consistent box office results.
Earnings Are Back in the Black
On top of several other positives, the Q3 earnings report also showed that Paramount had achieved profitability for the first time since Q4 of 2022. The company reported $0.36 per share, a 71% increase over the year-ago quarter.
Analysts also expect Paramount to maintain a roughly similar level of earnings throughout 2024. Assuming the company consistently turns a profit, investors could become less wary and gradually add buying support to the stock.
Is Paramount Stock Undervalued?
According to 26 analysts, Paramount is marginally undervalued with fair value sitting 4% higher at $14.56 per share.
While Paramount’s recent success comes on the back of a slower period for the company, it’s worth acknowledging how cheap the stock is.
Paramount trades at 13.5x forward earnings and 0.6x cash flow. The price-to-sales ratio is also 0.3x, one of the lowest multiples to sales at which PARA has ever traded.
Overall, Paramount appears to be on sale at current prices.
The Stock Is Appealing, but Know the Risks
Despite solid recent performance and very attractive pricing, Paramount does have its fair share of potential pitfalls. Chief among these is its competitive position, which is weaker than larger entertainment companies like Disney and Netflix.
Paramount is clearly executing its streaming growth strategy well, but it’s important to remember that it’s still only the fifth-largest streaming service. Ultimately, larger firms are likely to have a natural competitive edge by virtue of scale.
Paramount is also seeing its revenues from legacy TV broadcasting drop. Although this segment contributed $4.6 billion in Q3 revenue, that was down 8% from the previous year.
The programs produced for this medium are also valuable when placed on streaming services, somewhat mitigating the issue. Investors may, however, want to consider that legacy television will likely be an ever smaller part of Paramount’s revenue mix as the years go on.
Investors may also find Paramount’s near-term return potential a bit dismal. With a 12-month median target price of $14.58 and a current price just under that, Paramount is expected to be almost completely flat over the next year.
Distressed value stocks like Paramount sometimes take time to correct upward, potentially creating opportunity costs for investors elsewhere.
Finally, Paramount has lost significant ground in the area of its dividend over the last year. Once a respectable source of dividend income, the company cut its dividend by nearly 80% after Q1 2023. Today, PARA shares yield just 0.9%.
Given that Paramount is just now getting back to positive earnings territory, management may be cautious in raising dividends until a stronger trend of positive results can be established. For investors focused on income, therefore, Paramount has likely lost much of its appeal.
Is Paramount Worth Buying Now?
Though the company has gone through a difficult time, Paramount is still a valuable entertainment business. Paramount has diversified revenue streams, an excellent intellectual property portfolio, a fast-growing streaming service and a very attractive price tag.
PARA shares do carry a decent amount of risk for a legacy media company, but the underlying strengths of the company could make them risks worth taking.
Value investors may great deal to like in Paramount, as will those looking for long-term growth in the streaming business. Due to its recent dividend cut, Paramount may not be a good choice for income investors. With a long enough time horizon, though, there is still potential for dividend growth if positive earnings remain steady.
A final factor that investors should consider is the possibility of a company buyout. Though nothing is definitive yet, the stock has seen slight upward pressure in recent weeks amid the possibility of an acquisition by media mogul Byron Allen. In the event of an acquisition, shareholders would likely receive a decent premium for their shares when compared to current market prices.
Paramount ultimately seems to be a moderate buying opportunity, though investors may want to keep their positions small for now to balance off the risks. The company’s struggles to sustain positive earnings make it far from a sure thing, but with the most recent quarter’s growth taken into account, it doesn’t appear that Paramount is a value trap either.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.