Is Now the Time to Buy Paramount Global Stock?

Bulls Say

• CBS owns valuable sports rights, including the NFL, NCAA March Madness, and college football. This popular programming gives CBS leverage in negotiations with pay-television distributors for retransmission fees and with advertisers interested in the live viewing audience.
• Paramount+ is poised to gain share and drive top-line growth.
• High-quality content is tough to build from scratch, and CBS owns one of the more successful TV production studios.

Bears Say

• Paramount’s business model depends on the continued growth of retransmission, reverse compensation, and affiliate fees. Increased cord-cutting by consumers and lower ratings could threaten the growth of these fees.
• If advertisers shift money away from the broadcast networks, profitability at Paramount will also fall rapidly because of the high operating leverage of the TV business model.
• Developing hit programs can be unpredictable, especially as the company is trying to develop more shows internally.

Morningstar Analyst Neil Macker Says

Formed via the reunion of Viacom and CBS, the rebranded Paramount Global PARA derives a durable competitive advantage from the CBS broadcast network, a valuable portfolio of cable networks with worldwide carriage, production studios, and a now deeper content library. Given our overarching premise that the value of high-quality content will continue to increase, the production studios are among the most attractive assets of the reunited company.

CBS Studios has a history of generating hit programs such as NCIS and then creating spinoff series such as NCIS: New Orleans and NCIS: Los Angeles. These series generate multiple cash flows across different windows, such as broadcast first run, syndication, and streaming on both subscription and ad-supported services. We expect the company to increase the percentage of content on the broadcast network created in-house (currently above 70%) to fully capture the multiple cash flows that a hit show can produce.

We believe the CBS broadcast network also provides Paramount with an advantage, as the TV networks are the only outlets to reach almost all households in the United States. The ongoing fragmentation of media impedes advertisers’ ability to reach a mass audience. Even with viewers’ shift toward cable over the years, network ratings still outpace cable ratings and provide advertisers with one of the only remaining methods for reaching a large number of consumers. We believe the combination of highly rated original programming and exclusive sports rights will allow CBS to continue to increase its revenue from retransmission fees and reverse compensation while still receiving higher ad rates than a typical cable network.

We think top-line growth will be driven by streaming revenue from Paramount+ and Pluto TV. The two services build on the company’s strong content creation abilities and deep programming library as well as the secular trend toward greater streaming adoption. As a result, we think Paramount+ can still carve out a position in this intensely competitive market despite the large head start of the incumbents.

Key Proprietary Morningstar Metrics

• Fair Value Estimate: $58
• Star Rating: 5 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Negative