Paramount Earnings: Success with Streaming Subscribers and Costs Highlight Strong Results

Key Morningstar Metrics for Paramount Global

• Fair Value Estimate: $25.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Paramount Global’s Earnings

Paramount’s PARA direct-to-consumer streaming business underpinned its excellent third-quarter sales and profits, buoying market enthusiasm for the segment. Most importantly, management now expects that the firm saw its peak DTC operating losses (which have heavily weighed on firmwide margins) in 2022, and that the segment will continue improving from here.

It’s much too early to declare success for Paramount’s streaming business, but we believe the cloud over the firm’s value is starting to lift. We’re maintaining our $25 fair value estimate and think the stock is undervalued.

Overall DTC revenue was up 38% year over year, with revenue at the flagship Paramount+ service up 61%, driven by both subscriber growth and price increases. Despite the higher prices, Paramount+ added 2.7 million net subscribers in the quarter, and average revenue per subscriber was up 16%. Nearly 20% growth in DTC advertising revenue complemented the DTC subscriber revenue growth (up 46%).

Perhaps most important was that the adjusted DTC operating loss declined from $343 million in the year-ago period to a loss of $238 million this quarter. We expected 2023 DTC losses to eclipse those of 2022. We expect annual improvement in DTC operating losses throughout the rest of our forecast, as Paramount+ gets better leverage on a higher revenue base and takes advantage of its bigger and more mature scale.

Revenue in the TV media business was down 8% year over year, mostly on lower advertising revenue relative to last year’s political season, but the segment was able to eke out some margin expansion nonetheless, as management’s focus on enhancing profits goes beyond improving DTC losses. Affiliate and subscription revenue was roughly flat, while licensing and other revenue was down 12%. Labor strikes contributed to the licensing weakness, but we expect licensing growth to remain challenged as more content finds its way exclusively to Paramount+.