Is Paramount Global Stock A Buy?

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PARA
Paramount Global

Paramount Global stock (NASDAQ:PARA) posted a mixed set of Q2 2022 results, weighed down by continued losses in its streaming business and a tough advertising market, although the theatricals business fared well driven by the Top Gun sequel. Total revenue for the quarter rose by about 19% to $7.78 billion, while operating profits fell 33% year-over-year to $819 million. Paramount has been focusing on building its streaming operations, investing heavily in content and marketing. Although it’s a tough time to be in the streaming business, given the mounting competition and lower demand growth following the end of the Covid-19 lockdowns, the company certainly is making progress. Over Q2, global direct-to-consumer subscribers rose to nearly 64 million, up by 1.3 million versus the last quarter, despite the company’s exit from Russia, adjusted for which subscribers would have risen by 5.2 million. This is well ahead of Netflix, which actually lost 1 million subscribers over the quarter. Streaming-related revenue also rose 56% year over year, to $1.2 billion, including $830 million in subscription revenue and $363 million in advertising revenues.

Paramount stock declined by almost 4% following the earnings and the stock also remains down by about 20% year-to-date as the markets penalize companies that prioritize long-term investment over current cash flows in a rising interest rate environment. For perspective, Paramount expects that its streaming losses will total about $1.8 billion this year. However, we think PARA stock is undervalued at current levels of around $24 per share as it trades just about 7x last year’s adjusted earnings and about 10x consensus 2022 earnings.

Overall sales growth could also pick up a bit versus historical levels, given the long-term monetization prospects of the streaming business. For example, earlier this year, Paramount raised its 2024 direct-to-consumer revenue target from $6 billion to $9 billion. Moreover, Paramount can monetize its new content investments via a mix of television, theatricals, and streaming helping it to boost its returns compared to players such as Netflix which are purely streaming-focused. Paramount might also be an acquisition target, for larger streaming platforms and technology companies looking to enter the media space given its currently reasonable valuation (market cap of $16 billion). See our analysis on Paramount Global Valuation: Expensive Or Cheap for more details on Paramount’s valuation. We value Paramount stock at about $37 per share, about 50% ahead of the current market price. Check out our analysis on Paramount Global Revenue for a closer look at the company’s business model and key revenue streams.

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 Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 PARA Return 3% -20% -60%
 S&P 500 Return 0% -13% 85%
 Trefis Multi-Strategy Portfolio 3% -10% 253%

[1] Month-to-date and year-to-date as of 8/7/2022
[2] Cumulative total returns since the end of 2016

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