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PARAMOUNT GLOBAL PARA S
January 27, 2023 - 10:37am EST by
jso1123
2023 2024
Price: 22.48 EPS 1.23 1.56
Shares Out. (in M): 650 P/E 18.4 14.4
Market Cap (in $M): 14,674 P/FCF 0 0
Net Debt (in $M): 11,257 EBIT 0 0
TEV (in $M): 25,931 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

Summary: 

  • Legacy media that encompasses 79% of revenue is dying.  Cord cutting is accelerating.  Viewership is falling with eyeballs moving to streaming apps.  Sports viewership is holding up best which is resulting in significant inflation for sports rights, negatively weighing on margins.  Advertising dollars are being forced out driven by declining ROI on falling viewership. 

  • Paramount is late to the game in streaming and is investing aggressively to catch up.  The primary growth driver is Paramount+.  The Company’s DTC assets will lose ~$1.7bn in 2022 as it invests in content, distribution, and marketing ahead of getting the scale necessary for profitability.  Paramount is competing against larger / better financed competitors that already have significantly more traction than Paramount+.  The more successful PARA is with its streaming assets, it implies an even more bearish outlook for the linear networks.

  • I model the legacy TV Media assets experiencing EBITDA declines at an 8% CAGR.  The DTC efforts will reduce losses but likely still losing ~$900mm by 2025.  Applying 9x PE to $1.60 of EPS (on 5x leverage) results in a $14 stock or down ~35%.    

Background: 

PARA was formed by the merger of CBS and Viacom in December 2019.  The Company changed its name to Paramount Global to emphasis the pivot from legacy linear TV to streaming.  The Company generated $29bn in revenue in 2021 that can be broken down as follows:

1.       TV Media (CBS, Nickelodeon, Comedy Central, MTV, Showtime, BET): 79% of Revenue

2.       Direct to Consumer: 12% of Revenue

 

3.       Filmed Entertainment: 9% of Revenue

 

The profitability of PARA is even more skewed towards TV Media as the Direct to Consumer businesses are in the process of scaling.  The DTC segment lost $1bn in 2021 and will lose $1.7bn in 2022E.  Thus, the TV Media segment contributed $5.9bn of EBITDA on a consolidated total of $4.4bn in 2021 and will contribute $5.3bn of EBITDA on a consolidated total of $3.3bn in 2022E.  Losses for the DTC business are expected to peak in 2023 before improving in the outer years. 

Investment Thesis:

  • Decline in Legacy Media

o   Cord cutting began accelerating meaningfully in 2019/2020 with current levels at their worst.  Household penetration peaked in 2009.  Cord cutting and less ability to take price is resulting in slower affiliate fee and retrans growth industry-wide.

 

o   Cable and broadcast networks have seen their audience reach evaporate.  Since 2016, affiliates of the big four broadcast networks have seen their reach fall from ~79% to ~56%.  Cable networks have seen similar declines in reach.  The demographic of legacy TV is becoming older.

 

o   Within PARA’s TV Media segment, cable networks account for ~50% of Revenue and ~60% of EBITDA.  PARA is poorly positioned on cable networks however.  The reason is that PARA has no meaningful news or sports channels.  Sports and news have held up significantly better than kids, general entertainment, and movies where PARA is most exposed. 

o   PARA owns the leading broadcast asset in CBS.  Broadcast networks have fared materially better than cable networks driven by a combination of 1) older demographic, 2) greater exposure to live sports and news, and 3) less impact from cord cutting.  Having said that, the broadcast networks are increasingly reliant on sports content to drive viewership.  As general entertainment has been more impacted by streaming services to date than live entertainment, it has increased the competitive environment for sports rights among traditional media assets.  PARA has recently renewed three of its most important sports at significant increases.  First, the NFL contract resets in 2023 at an annual fee of $2.1bn versus the $1bn under the current contract.  Second, CBS is currently paying $55mm annually to air what is considered the #1 game of the week in the SEC conference.  The contract with the SEC ends after the 2023 season and will be replaced with a contract with the Big Ten at an annual fee of $350mm (so PARA is paying ~$300mm extra annually to get a worse matchup).  Third, PARA recently renewed its rights for the Champions League beginning in 2024 at $250mm annually versus ~$100mm annually in the current contract.  Going forward, sports rights are now also seeing more competition from streaming competitors.  Thus, CBS faces limited topline growth but with escalating costs.      

 

o   Advertising dollars will be forced out of TV consistent with the shift of eyeballs.  Networks and affiliates have managed to stave off a complete collapse of their revenues by matching declining viewership with inflating ad prices (up double digits) but given the dramatic drop in reach and falling ROI, this trend is unsustainable.  Compounding the structural concerns around advertising is the current state of the economy with decelerating growth resulting in cyclical weakness.  It should be noted that PARA’s results are currently being propped up by a strong upfront in May 2022 that likely won’t be repeated in 2023 given how the scatter market is performing.  Thus, while the advertising market is weak, I don’t think the worst has hit PARA.

 

·         Direct to Consumer Assets Are Subscale Requiring Significant Investment

o   Paramount is late to the game in streaming and is investing aggressively to catch up.  The primary growth driver is Paramount+.  The Company’s DTC assets will lose ~$1.7bn in 2022 as it invests in content, distribution, and marketing ahead of getting the scale necessary for profitability.  Paramount is competing against larger / better financed competitors that already have significantly more traction than Paramount+. 

o   The more successful PARA is with its streaming assets, it implies an even more bearish outlook for the linear networks.

 

 

 Key Risks:

  • Success in D2C Products.  D2C products are currently contributing minimal (and potentially even negative) value to PARA’s stock.  Should the market get comfort with the market position of these assets and the ability to turn the $2bn in losses into future profits, a SOTP methodology could gain traction with significant value tied to the D2C assets.

  • Cyclical Upturn in Advertising.  40% of revenue is tied to advertising.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

  • Earnings
  • General news flow that on a daily basis is generally negative
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