Paramount Earnings: Many Positive Trends While Industry Headwinds Hinder Sales and Profits

Key Morningstar Metrics for Paramount Global

• Fair Value Estimate: $20.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Paramount Global’s Earnings

Steep declines in Paramount Global’s PARA fourth-quarter sales and adjusted EBITDA were unsurprising, as the company faced the same environment as its peers in its traditional linear television and licensing businesses. A very weak television advertising market and the lack of new shows resulting from the actor and writer strikes exacerbated the ongoing decline in pay-TV subscribers for all network owners. However, news on the direct-to-consumer segment, which includes the Paramount+ streaming service, was universally positive, though vague. We think the company is on the right track and remains materially undervalued relative to our unchanged $20 fair value estimate.

We believe Paramount+ is benefiting from the inclusion of live programming, its integration with Showtime, and management’s openness to bundling, including with Walmart+. Paramount+ added over 4 million subscribers during the fourth quarter, which the firm said was roughly balanced between the US and international markets, and average revenue per user grew 30% year over year. While subscriber-based metrics are likely skewed due to the integration with Showtime subscribers, the revenue benefits were unambiguous.

Direct-to-consumer sales grew 34% year over year, and operating losses shrank. Management expects 20% ARPU growth for Paramount+ in 2024 while it continues to add subscribers and reduce costs, in part because of the Showtime integration. For 2023, the direct-to-consumer adjusted EBITDA loss was almost $1.7 billion, a slight improvement from the prior year. However, management expects Paramount+ to be profitable in the US by 2025, and we believe it has already passed the point of dragging firmwide EBITDA steadily lower. Management expects growth in both EBITDA and free cash flow in 2024, with the latter being even more impressive, considering 2023 free cash flow was inflated by lower content spending due to the strikes shutting down production.