- Cable Networks constitute 62% of the Trefis price estimate for Paramount Global's stock.
- TV Entertainment constitutes 32% of the Trefis price estimate for Paramount Global's stock.
WHAT HAS CHANGED?
- Q2 2022 Results
Paramount Global posted a mixed set of Q2 2022 results. While revenue rose 19% year-over-year to $7.8 billion, EPS declined by 60% year-over-year to $0.62. The year-over-year revenue growth was driven by the company's Direct to consumer operations and its filmed entertainment division, which benefited from the release of movies such as Top Gun: Maverick. Profits have taken a hit as Paramount has doubled down on content and marketing-related spending for its streaming business. The streaming business continued to gain traction, with Direct to Consumer revenues rising by 56% year-over-year and global streaming subscribers growing to over 64 million.
Note: Paramount Global's FY'21 ended on December 31, 2021. Q2 FY'22 refers to the quarter that ended on June 30, 2022.
- CBS-Viacom Merger
In August 2019, CBS and Viacom announced that the two companies, which separated in 2006, had decided to merge. The deal was closed in early December 2019. Industry trends in recent years have taken a toll on both companies, dwarfed by media giants such as AT&T and Comcast. The merger enables the joint entity, now called Paramount Global, to realize meaningful cost synergies while potentially giving it the scale to secure better terms with television distributors and advertisers.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Paramount's value that present opportunities for upside or downside to the current Trefis price estimate for Paramount:
Cable Networks Revenue Growth
- Cable Networks Revenue: Paramount's cable networks, which include Showtime Networks and streaming operations, have grown their revenue from $12.56 billion in 2018 to 13.44 billion in 2021 driven by its Pluto TV internet TV service and growing subscribers for subscription streaming services. Trefis expects sales to grow to over $16.5 billion by the end of our review period. However, if sales only rise to around $14 billion due to higher competition, there could be a 15% downside to our price estimate. On the other hand, if Cable Network Revenue rises to over $20 billion by the end of our forecast period, there could be a 10% upside to our price estimate.
TV Entertainment Revenue
- TV Entertainment revenue : Paramount's TV entertainment business, which includes its broadcasting networks, heavily relies on advertising. We forecast revenues to increase slightly from around $12.2 billion in 2021 to $14.6 billion by the end of our forecast period. Our price estimate could be a 5% downside if this figure remains subdued at around $12 billion. This could happen if the network cannot secure/renew future sports programming rights and its non-sports programming doesn't pick up. Also, the growth of digital platforms has led to lower viewership on television. On the other hand, there could be around a 10% upside to our price estimate if the network revenues blow past expectations north of $17 billion by the end of our forecast period. This is possible due to a better ad marketplace driven by the growth in the economy and Paramount's appealing content and its sports coverage.
For additional details, select a driver above or a division from the interactive Trefis split for Paramount at the top of the page.
Paramount makes money primarily through advertising on Television Network, licensing of TV shows, fees charged to cable and satellite operators for carrying premium channels such as Showtime, and advertising revenues earned by its owned TV stations, radio business, and billboards.
SOURCES OF VALUE
Cable Networks are most valuable for Paramount primarily due to their consistent revenue growth rate and high margins.
Cable Networks' revenues stood at around $13.4 billion in 2021, with the expected growth being attractive. Given the demand for premium content, stability of subscription business, newly launched streaming service, and annual fee increases, we expect these revenues to grow to almost $17 billion by the end of our forecast period.
Furthermore, this business has high EBITDA margins of around 26% compared to 18% for TV Entertainment and 9% for Filmed Entertainment.
Paramount Streaming push
Paramount has been increasingly doubling down on its streaming business. At the end of 2021, Paramount had 56 million viewers on its Paramount+ and Showtime services and 64 million monthly active users on the ad-supported Pluto TV business. While the company is planning big content investments for its streaming brands and is targeting 100 million paying subscribers by the end of 2024, this could weigh on profitability in the near term.
Increasing pay-TV competition
Increasing competition among pay-TV providers such as Comcast, Time Warner, DirecTV, AT&T, and Verizon is favorable for media companies. In such a scenario, Paramount can gain negotiating power in discussions regarding pricing subscription fees for its programming content.
Increasing disputes with pay-TV service providers
Even though competition among pay-TV companies is increasing, they cannot continue bidding up subscription prices for channels. To protect consumers, pay-TV providers are increasingly taking a stand against media companies, leading to frequent channel blackouts.
Online licensing & broadcast advertising
With the growth of online streaming companies such as Netflix that monetize older content primarily, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard, resulting in lower advertising revenues for most media companies. So far, licensing revenue growth has not been able to offset the declines seen on the advertising front completely. Having said that, broadcasting networks such as FOX, CBS, NBC, and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.