With Its Studio Business Much Sought After, What’s Next For Paramount?

Paramount Global stock (NASDAQ: PARA) rallied by close to 12% in Wednesday’s trading following a report that private equity firm Apollo Global Management extended a $11 billion offer to purchase Paramount Global’s studio operations. The news comes at a time when the company is evaluating another offer from Skydance Media to merge with all of Paramount and could potentially set off a bidding war for the storied Hollywood studio. Paramount’s studio business is much sought after, given its expansive library of legacy content,  valuable franchises such as Star Trek and Transformers, and recent strength in the theatrical space with high-profile releases including the recent Top Gun and Mission Impossible films. Netflix, too, had previously expressed interest in the company. However, it’s not a given that the deal will go through. Shari Redstone who has about 80% voting control of the Paramount Global stock has largely resisted deals to sell the studio standalone thus far, although she has been open to selling the company as a whole.

Paramount stock remains down by almost 43% over the last 12 months due to multiple factors. The linear TV advertising market has faced headwinds as high inflation and softening consumer spending have caused marketers to pare back on ad budgets, and this has impacted Paramount. The company’s considerable investments into its streaming business have also weighed on profits. Paramount posted a mixed set of Q4 2023 results. Although revenue fell short of estimates, declining by 6% year-over-year at $7.64 billion, earnings beat expectations standing at $514 million, up from $21 million in the year-ago period. The company’s flagship streaming offering, Paramount+, had 67.5 million subscribers as of the end of December, marking a net increase of 4.1 million. The service saw revenue grow by 69% year-over-year, led by the subscriber gains and a move to raise prices. Last year, Paramount+ combined with Showtime’s streaming app, helping the company raise subscription revenues.

PARA stock has suffered a sharp decline of 65% from levels of $35 in early January 2021 to around $12 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, PARA stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -19% in 2021, -44% in 2022, and -12% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PARA underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PARA face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

We believe that Paramount stock looks attractive at current levels of about $12 per share.  The recent $11 billion offer from Apollo for just the studio business alone is well above Paramount’s total market cap of about $8 billion as of Friday and underscores the company’s overall undervaluation. While Paramount faces headwinds to its legacy TV business, we think that earnings have meaningful potential to increase in the coming years, given the long-term monetization prospects of the streaming business. The company also expects the service to see domestic profitability from 2024 onward. Paramount stock trades at just about 11x projected 2024 earnings (which are being depressed by the current streaming spending) which is attractive, in our view. This is well below the likes of Netflix, which trades at almost 40x 2024 earnings. We value Paramount stock at about $15 per share, which is about 20% ahead of the current market price. See our analysis on Paramount Global Valuation: Expensive Or Cheap for more details on what’s driving our price estimate for Paramount.

[1] Returns as of 3/22/2024
[2] Cumulative total returns since the end of 2016

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