Despite Skydance Drama Is Paramount Stock Still Cheap At $10?

Paramount Global stock (NASDAQ: PARA) remains down by close to 30% since early January. This compares to media peer Disney (NYSE:DIS), which has gained about 10% over the same period. The recent sell-off comes as Paramount’s majority owner National Amusements called off merger discussions with Skydance Media after the two companies could not arrive at mutually acceptable terms for a transaction. Although there are other interested parties including Sony and Apollo Global Management, Skydance was seen as the company most favored by controlling shareholder Shari Redstone, who has about 80% voting control of the Paramount Global stock. Paramount’s considerable investments in its streaming business have also weighed on profits in recent years and this has also hurt the stock.

Looking at a slightly longer period, PARA stock has suffered a massive decline, falling from $35 in early January 2021 to around $10 now, down about 70%. Returns for the stock were -19% in 2021, -44% in 2022, and -12% in 2023. The S&P 500, in comparison, rose by about 45% over this roughly 3-year period. 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. To be sure, beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks. In comparison, the Trefis High Quality (HQ) Portfolio, comprised 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 mixed macro environment with weak consumer sentiment and elevated interest rates, could PARA face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P or will it see a recovery?

There have been a few positive developments for Paramount in recent months. The company posted a better-than-expected set of Q1 2024 results. Revenue grew by 5.8% year-over-year to $7.68 billion, while earnings increased to $0.62 up from $0.09 in the year-ago quarter.  Paramount has also been focusing on cutting costs, with its selling, general, and administrative expenses declining by 5.2% year over year to $1.66 billion. The company’s streaming business is also gaining traction. The flagship streaming offering, Paramount+, had approximately 71 million subscribers as of the end of the last quarter, marking a net increase of 3.7 million. The service saw revenue grow by 51% year-over-year, led by the subscriber gains and a move to raise prices. Last year, Paramount+ and Showtime’s streaming app helped the company raise subscription revenues.

We believe that Paramount stock looks attractive at current levels of about $10 per share.  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.

While the recent setback in striking a deal to sell the company could cause a near-term overhang on the stock, Paramount’s assets remain very valuable. Paramount’s storied 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. Other potential investors who have expressed interest in the company include an investor consortium led by producer Steven Paul and another media executive backed by private equity firm Bain Capital.  The other option for Paramount could be individual asset sales including BET and local TV stations apart from its CBS operations.

Paramount stock trades at just about 8x 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 $14 per share, which is almost 40% 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 6/17/2024
[2] Cumulative total returns since the end of 2016

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