Paramount Earnings: Direct-to-Consumer Losses Continue To Increase

Paramount Stock at a Glance

• Fair Value Estimate: $35
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

Paramount Earnings Update

Paramount’s PARA direct-to-consumer efforts continue to pay off in terms of subscriber additions, but DTC segment losses continued to mount in the first quarter. The quarterly dividend was cut to $0.05 from $0.20, providing $500 million in annual “savings.” This money will not be allocated to increased content spending but rather to gain financial flexibility and is a direct consequence of Paramount lagging peers in shifting its focus to profitability from DTC customer growth at all costs. Paramount also took a $1.7 billion noncash programming charge related to the plan to integrate Showtime into Paramount+. We are lowering our fair value estimate to $35 from $40 to account for weaker margins at all three segments.

Revenue fell 1% during the quarter despite DTC revenue jumping 38% to $1.5 billion. DTC subscription revenue was up 50% while ad revenue bounced back from a weak end to 2022 to expand by 15%. We have been expecting relatively weak ad revenue growth in the first half of 2023, but the continued engagement growth at Pluto and Paramount+ more than offset economic weakness. Pluto added 1.5 million monthly active users, raising its total to 80 million but more important, total viewing hours expanded 35% year over year. If engagement can continue to grow along with users, Pluto should be able to drive ad price increases as advertisers flock to the service.

Paramount+ added 4.1 million subscribers to reach 60 million globally. The platform has added 20.4 million subscribers over the past year versus 10.9 million for Netflix. However, the quarterly adjusted EBITDA loss for the segment expanded to $511 million from $456 million a year ago. Management remained firm that 2023 will be the peak year for DTC losses. Still, Paramount’s continuing operations burned through $554 million during the quarter, highlighting the need for the dividend cut.