ViacomCBS rebranded itself as Paramount Global (NASDAQ: PARA) last February. That relaunch ended a messy history between Viacom and CBS, which included a merger in 2000, a split in 2005, and a remerger in 2019.
Paramount's stock has declined 27% since then, mainly due to concerns about the macro headwinds for its advertising business and its streaming losses. But could this out-of-favor media stock bounce back over the next 12 months?
Image source: Getty Images.
A year of stable revenue growth
In 2022, Paramount generated 72% of its revenue from its TV Media segment, which houses CBS, The CW, Showtime, Comedy Central, Nickelodeon, BET, and other networks. This segment relies heavily on linear TV ads.
Another 16% came from its direct-to-consumer (DTC) segment, which houses its Paramount+ and Pluto TV streaming media platforms. Paramount+ is a subscription-based platform that comes in ad-supported and ad-free tiers, and Pluto TV is a free ad-supported platform. Paramount+ had 56 million subscribers at the end of 2022, and Pluto TV had 79 million monthly active users.
Yet Paramount is still an underdog in the streaming race. In their latest quarters, Netflix(NASDAQ: NFLX) had 231 million paid subscribers, Walt Disney(NYSE: DIS) hosted 235 million across Disney+, ESPN+, and Hulu, and Warner Bros. Discovery (NASDAQ: WBD) had 96 million across its streaming and on-demand services for HBO and Discovery.
The remaining 12% of Paramount's revenue came from its filmed entertainment division. Here's how those three core businesses fared in 2022.
Segment | 2021 Revenue | 2022 Revenue | Growth (YOY) |
|---|---|---|---|
TV Media | $22.7B | $21.7B | (4%) |
DTC | $3.3B | $4.9B | 47% |
Filmed Entertainment | $2.7B | $3.7B | 38% |
Total Revenue | $28.6B | $30.2B | 5% |
Data source: Paramount Global. YOY = Year-over-year.
Paramount's TV media business struggled with macro headwinds, which reduced its advertising revenue by 7% for the full year as well as the secular decline of linear TV platforms. However, the DTC segment's advertising revenue still rose 17% as its ad-supported streaming platforms locked in more viewers. Its subscription revenue also surged 66% as Yellowstone, Tulsa King, and the streaming release of Top Gun: Maverick brought in more subscribers.
Paramount's movie business also generated robust growth throughout the year with six box office hits: Top Gun: Maverick, Sonic the Hedgehog 2, Scream 5, Smile, Jackass Forever, and The Lost City. That hot streak indicated that Paramount's franchises and fresh content can still go toe-to-toe against Disney and Warner in movie theaters.
Paramount didn't provide any revenue guidance for 2023. But during its fourth-quarter conference call, CEO Bob Bakish said the advertising market was experiencing an "early stabilization" and would likely improve in the "back half of the year." However, analysts expect Paramount's revenue to only rise 2% this year as it laps the strong growth of its streaming and filmed entertainment businesses in 2022. But in 2024, they expect its revenue to grow 5%.
All eyes are on its DTC margins
Paramount's top-line growth is stable, but its widening DTC losses and the softness of the advertising market reduced its operating margin from 22% in 2021 to 8% in 2022. Its adjusted EPS from continuing operations plunged 51%, while its adjusted operating income before depreciation and amortization (OIBDA) fell 26% to $3.3 billion.
That decline was mainly driven by the DTC segment's adjusted OIBDA loss of $1.8 billion in 2022, which nearly doubled from its loss of $992 million in 2021. Paramount faces the same dilemma as Disney and Warner Bros. Discovery. All of these legacy media companies need to quickly pump out more streaming content, expand their streaming infrastructure, and evolve from distributors to DTC platforms to keep pace with Netflix -- but doing so in such a compressed timeframe is an extremely capital-intensive strategy. The cutthroat competition also makes it difficult to raise their subscription fees.
Nevertheless, Paramount believes it can stabilize its DTC losses this year by hiking its streaming prices, optimizing its spending, and growing its advertising business. It sees 2023 as another challenging year, but expects to grow its profits again in 2024 as its free cash flow (FCF) turns positive again. Analysts expect its adjusted EPS to decline 46% in 2023 but rise 85% in 2024 as the macro situation improves and economies of scale kick in.
Will its stock recover over the next 12 months?
At $22 per share, Paramount's stock trades at 24 times this year's earnings. That multiple is a bit high relative to its growth rates and those of its industry peers. Disney and Netflix, which are both expected to generate much stronger growth than Paramount this year, trade at 24 and 30 times forward earnings, respectively. But unlike Disney and Netflix, which don't pay any dividends, Paramount still pays an attractive forward yield of 4.4%.
That high yield might limit its downside potential, but I don't think investors will flock back to Paramount until they see a meaningful stabilization of its DTC margins. Therefore, I expect its stock to trade sideways for at least the next 12 months.
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Leo Sun has positions in Walt Disney and Warner Bros. Discovery. The Motley Fool has positions in and recommends Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
