Paramount Global (NASDAQ:PARA) is one of the largest media and entertainment companies in the world. Increasingly best-known for its Paramount+ streaming service, the company also holds a massive catalog of TV and film properties.
The stock, however, has been struggling a great deal this year, selling off nearly 40 percent. In the most recent quarter, Paramount missed expected revenues of $7.01 billion, delivering only $6.92 billion overall.
Troublingly, the company’s legacy TV revenues actually fell year-over-year, coming in 5 percent lower than in 2021. The loss was attributable to lower TV subscriber counts, suggesting that some of Paramount’s television channels could be struggling to retain audience share. Advertising revenue from traditional TV also fell 3 percent.
Earnings were also considerably lower than expected, with Paramount reporting $0.39 per share against a consensus estimate of $0.43. This earnings weakness is tied to lower TV revenues, where margins are typically quite high.
Paramount+, though, stood out as an extremely bright spot in the company’s quarterly reporting. The subscription service added 4.6 million users last quarter, making it the leading streaming service in terms of new additions.
Although Paramount+ was in a very early stage at this time last year, the service managed to produce a 95 percent year-over-year increase in revenue.
This leaves Paramount as a mixed bag from a growth perspective. Consumers are clearly interested in its streaming service but are less enthused about its traditional TV business.
Unfortunately, the legacy television business offers higher ad revenues and margins. Unless the reduction in television revenues becomes a sustained trend, though, it may not be as concerning as it appears on the surface.
Fair Value Upside?
Wall Street generally expects Paramount to have a lackluster year in which the stock remains largely flat. The target price from analyst forecasts is $18.50, down about 1.5 percent from the most recent price of $18.79.
The most bearish estimate suggests that Paramount could fall as low as $11, while the most bullish foresees it rising to $32. Due to this wide range, investors should treat the median forecast with a degree of skepticism.
Ongoing dividends could enhance Paramount’s total shareholder compensation. Due in part to the selloff the stock has seen this year, Paramount currently yields 4.41 percent.
With a payout ratio of just over 20 percent, Paramount’s dividend appears to be relatively safe. However, the company only started paying a dividend this year. As such, there’s no history of regular increases for investors to look at.
One area where Paramount Global does look reasonably attractive is its valuation. At just 8.5 times its earnings, the stock is trading well below the market average. Paramount is also priced at just 0.36 times sales and 0.46 times its book value. Even though the company is struggling with growth, these numbers suggest that it could be undervalued.
TV Revenues On The Decline
Falling TV revenues represent by far the largest risk to Paramount going forward. While the company is making a fairly successful pivot toward streaming, legacy broadcasting remains an extremely important part of its overall business. If TV revenues continue to fall, Paramount could struggle to meet earnings expectations going forward.
Competition in the streaming industry could also be a significant problem for Paramount. While management is executing well so far, the shift toward streaming has created a highly competitive environment.
Other streaming providers, particularly Netflix, Disney and Hulu, could eventually take Paramount’s leading spot as the fastest-growing streaming service.
Finally, Paramount is susceptible to macroeconomic risks. Sustained inflation or an economic downturn next year could cause consumers to reduce their entertainment spending. While such a downturn would likely be temporary, Paramount shareholders could sustain heavy losses if the company continues to post lower revenues and earnings.
Is Paramount Global a Buy?
There’s no doubt that Paramount looks riskier than it did earlier this year in light of its recent earnings report. However, there’s still a good deal to like about the business.
As noted in the quarterly earnings call, for instance, Paramount has produced six #1 films this year. The leading film the company released in 2022 was Top Gun: Maverick, a sequel to the 1986 hit Top Gun. This success demonstrates Paramount’s deep pool of intellectual properties and its ability to capitalize on them.
Paramount is also rolling out an answer to rising streaming subscription costs in the form of its Pluto TV service. This service hosts a wide variety of films and TV shows on an entirely ad-supported revenue model. The service already has 72 million users worldwide, suggesting that there is broad consumer interest in an ad-based alternative to streaming subscriptions.
From a value perspective, Paramount looks relatively cheap. Even with revenues and earnings missing expectations, the underlying business is still highly lucrative. As such, investors who buy at today’s prices may see good returns if Paramount regains its footing. With the stock heavily sold off in 2022, value investors could see a buying opportunity before prices can rebound.
Balanced off against these positives is the fact that Paramount is clearly struggling in the earnings department. Unless future growth can turn earnings around, investors could have a long wait for higher share prices.
Risks from competition and a challenging macroeconomic environment compound this problem, making Paramount’s future somewhat uncertain.
Ultimately, Paramount Global most likely falls into the category of a “wait and see” stock. Investors who already own shares may want to hold them, as there’s a decent chance that prices could rise on better earnings or revenue news in the future.
Those interested in Paramount, however, may want to wait another quarter or two to see where the company goes from here. If earnings and revenue are stronger in upcoming quarters, investors will likely still have a buying opportunity along with a clearer picture of the company’s trajectory.
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