Paramount Stock Is Down 70% Since 2021. Will A Q3 Earnings Surprise Drive A Recovery For The Stock?

Paramount Global stock (NASDAQ: PARA) is expected to publish its Q3 2023 results on November 2, reporting on a quarter that is likely to see the company’s revenues show little growth, as weak consumer spending and inflation weigh on advertising revenues. We project that revenue for the quarter will grow by about 3% year-over-year to $7.14 billion, roughly in line with consensus estimates, while earnings are expected to come in at $0.12 per share, ahead of consensus estimates. See our analysis of Paramount Global Earnings Preview for a closer look at what to expect when Paramount publishes its Q4 results.

Amid the current financial backdrop, PARA stock has suffered a sharp decline of 70% from levels of $35 in early January 2021 to around $11 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Notably, PARA stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -19% in 2021, -44% in 2022, and -35% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 (YTD) – indicating that PARA underperformed the S&P in 2021, 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection 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 current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PARA face a similar situation as it did in 2021, 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

The linear TV advertising market has faced headwinds as high inflation and softening consumer spending have caused marketers to pare back on ad budgets, and this has impacted Paramount. Over the first six months of this year, revenue from the TV Media segment was down by about 5% year-over-year, with ad sales from the segment down by over 10%. We are likely to see continued softness in the TV advertising front over Q3 as well, although the company indicated that it could see some strength from categories such as pharma, retail, movies, and travel. We expect the company’s direct-to-consumer business to remain the biggest driver of growth. Over the first six months of the year, Paramount saw D2C revenue rise 39% year-over-year to $3.18 billion, driven primarily by the Paramount+ offering, which now has approximately 61 million subscribers. Moreover, Paramount+ recently combined with Showtime’s streaming app and raised prices and this could also help to drive overall subscription revenues. We should also continue to see improvement in direct-to-consumer advertising sales.

We believe that Paramount stock looks oversold at current levels of about $11 per share. While Paramount faces headwinds to its legacy TV business, we think that Paramount’s earnings have meaningful potential to increase in the coming years, given the long-term monetization prospects of the streaming business. For perspective, the company is projecting a 20% uptick in average revenue per user for Paramount+ in 2024. 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 stock trades at just about 9x 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 over 28x 2024 earnings. We value Paramount stock at about $24 per share, which is well 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] Month-to-date and year-to-date as of 10/31/2023
[2] Cumulative total returns since the end of 2016

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