Media firm and video-streaming newcomer Paramount (PARA) has been on the receiving end of the brutal media and streaming industry sell-off. Its stock is flirting with 52-week lows on the back of a strong, albeit muted, second-quarter result. With lights put out on the streaming market, not even stellar growth numbers in its streaming platform Paramount+ were enough to move the needle (sustainably) higher. In any case, Paramount remains an industry laggard with an absurdly low price of admission.
Paramount shares have become so cheap (historically and versus industry averages) that even legendary value investor Warren Buffett (or his firm) initiated a small stake in the firm. With such a depressed 5.1x trailing earnings multiple and encouraging longer-term DTC (direct-to-consumer) ambitions, PARA stock seems like the underdog worth betting on as the streaming wars continue to evolve.
I remain bullish on PARA stock at an absurdly low 0.7x book value.
Paramount Stock Feels Shockwaves of Streaming Industry’s Plunge
Netflix’s (NFLX) colossal first-half flop has weighed on the entire streaming industry. The shockwaves have spread across the whole media industry, with up-and-comers like Paramount also taking a hit to the chin. Though many may conclude that the streaming wars are dead or that there isn’t much profit in the formerly-attractive market, I’d argue that Netflix’s downfall is the beginning of a pivotal moment for old-school media firms as they evolve for the new age.
Streaming is a hard game to compete in these days. Not only do the tech investments need to be made, but there’s no clear endgame for firms willing to run on the content-creation mouse wheel. Content remains king, and with so many firms throwing money at a finite number of viewers, there can only be so many winners.
At current valuations, it seems as though many expect Paramount will be one of the losers. Sure, Paramount+ isn’t the must-have streaming service. With other FAANG tech companies getting into the streaming wars, the incentive to switch or sign up for yet another subscription is arguably at a low point. Add a potential recession into the equation, and it’s clear that the odds seem stacked against a relative lightweight like Paramount amid its negative momentum.
Plenty of Growth to be Had from Paramount+
Looking further out, Paramount+ has the means to add to its subscriber growth. It’s on the right track regarding original content, with Halo and Star Trek: Strange New Worlds attracting new users. With more than 43 million subscribers on Paramount+, there’s a lot of room to run as Paramount looks to even the playing field with its fierce rivals.
Though Paramount+ still has more big growth days ahead of it, questions linger as to what valuation should be assigned to streamers amid their ongoing valuation reset.
Netflix stock seems to have settled at around 20x trailing earnings. Such a multiple may be rewarded to the best-in-breed streamers, and for Paramount, becoming the next Netflix is something to strive towards. For now, a Netflix multiple seems out of the question as the firm looks for DTC losses to peak.
Paramount+ is the new growth driver, and the firm needs to feed it to further its evolution. In the meantime, Paramount’s Filmed Entertainment and TV Media divisions are strong pillars of stability. Box office hit Top Gun: Maverick and Sonic the Hedgehog helped the Filmed Entertainment segment surge to $603 million for the second quarter, more than doubling year-over-year.
Undoubtedly, Maverick is one of the hottest films of the year. As Paramount finds the right balance with DTC and its traditional segments, I think the firm could evolve to become quite a disruptive force in streaming. If content is king, Paramount has proven that it has what it takes to be one of the winners in the streaming wars.
Is Paramount a Good Stock to Buy?
Turning to Wall Street, PARA stock comes in as a Hold. Out of 19 analyst ratings, there are six Buys, five Holds, and eight Sells.
The average Paramount price target is $26.78, implying upside potential of 7.1%. Analyst price targets range from a low of $18.00 per share to a high of $37.00 per share.
Conclusion: Paramounts Valuation Makes It Attractive
At such a wide discount to book value, I view the stakes as relatively low on PARA stock. However, many Wall Street analysts have their doubts when it comes to Paramount. While its multiple may scream value, there are significant uncertainties that are holding back a wave of upgrades. Management is committed to its DTC segment, even at the cost of profitability over the medium term.
PARA has some ambitious targets set for 2024. Even if it meets its goals, it’s tough to gauge how much the stock will be rewarded as investors sour on streaming and churn picks up in the face of a recession.
Doubling down on Paramount+ may prove a risky move, but it’s one that’s necessary. The next two years are sure to be a bumpy ride, but I’d be willing to bet that Paramount+ will have caught up to its bigger brothers in streaming.
For now, however, analysts would much rather wait and see before finding the need to upgrade.
