Undervalued by 40%, This Stock Is a Buy for High-Risk Investors

Paramount Global PARA stock is down nearly 50% in the past year. Warren Buffett’s Berkshire Hathaway has cut back its position in the name. And Morningstar recently downgraded the company’s economic moat rating to none from narrow. Given the uncertainty surrounding the future of streaming and Paramount’s less-than-stellar financial position, it’s no wonder there’s little investor enthusiasm for the stock. Yet Paramount is by no means a lost cause. In fact, we think its streaming strategy and content assets will allow it to survive. Trading 40% below our $20 fair value estimate, Paramount Global stock may appeal to contrarians who are comfortable with uncertainty—and who have a long time horizon.

Like peers, Paramount Global has been in a period of transition and facing significant uncertainty about how and whether the traditional linear television business will coexist or evolve in a media environment dominated by streaming services. But we think the company has the right strategy for streaming and advantages related to distribution and content ownership that will enable it to successfully manage the industry’s evolution. Management is focused on one platform for all its best content, consolidating Showtime and Paramount+ and including local CBS programming to potentially improve customer stickiness. CBS continues to garner the largest audiences of all television networks and holds NFL and March Madness rights into the 2030s. Paramount Pictures and CBS Studios remain among the most prolific creators of film and television programming. Still, we expect a more subdued business that won’t be able to increase profits nearly as much as in the past.

Key Morningstar Metrics for Paramount Global

• Fair Value Estimate: $20
• Star Rating: 4 Stars
• Economic Moat Rating: None
• Uncertainty Rating: Very High

Economic Moat Rating

We recently changed our moat rating for Paramount to none from narrow because of the uncertainty surrounding the industry shift to streaming and the new competition that has brought. We believe several of Paramount’s attributes will enable the company to survive in the new media landscape. However, we don’t expect streaming to ever be as profitable for Paramount as traditional linear television was, and the continuing secular decline in the traditional TV business is likely to damp future financial performance. As a result, we are increasingly less confident that Paramount’s return on invested capital—specifically based on the amount of profit it will generate per dollar invested to create content—will continue to exceed its cost of capital for the next decade. We do still think Paramount has some valuable intangible assets, including the CBS broadcast network, production studios that are topnotch in their ability to create popular content, and a variety of wide-reaching distribution outlets that can reach consumers via streaming, traditional television, and movie theaters.

Read more about Paramount’s moat rating.

Fair Value Estimate for Paramount Stock

Our $20 fair value estimate implies an enterprise value multiple of 10 times our projected 2024 adjusted EBITDA. We expect an average of 2% annual revenue growth for 2024-27. Our sales estimates are based on the trade-offs between the company’s TV media and direct-to-consumer segments. We project cash content spending of $18 billion-$19 billion in 2024, then rising 1%-2% annually throughout our forecast. Paramount spent $18.7 billion in 2022, the year before actors’ and writers’ strikes limited production and spending. Since 2022, it has commenced a new contract for NFL rights, which will cost an incremental $1 billion annually, but it has also combined Paramount+ and Showtime. Longer term, we expect sales growth to influence the company’s ability and willingness to spend on content, hence our low-single-digit projection. As the company finds cost efficiencies, we project adjusted EBITDA margin to rise from about 9% in 2023 to 12% in 2027. More-rational spending leads to free cash flow going from slightly negative in 2023 to over $1 billion by 2027 in our forecast.

Read more about Paramount’s fair value estimate.

Risk and Uncertainty

The evolution of the media industry that is currently taking place is the main factor behind our Very High Morningstar Uncertainty Rating. Each of Paramount’s historical revenue streams is under pressure. We believe a successful transition to a model that incorporates a mature streaming business and the incremental revenue it brings can alleviate some, but not all, of the shortfall relative to historical growth and profitability. However, there’s also risk that Paramount cannot drive adequate adoption of its streaming service to come close to the pre-streaming model and that revenue and margins deteriorate further as TV revenue continues to decline. Paramount’s financial leverage has been increasing the past few years, as EBITDA has declined materially and the firm has burned cash since 2021. We expect the firm to begin paying down debt and for the leverage ratio to improve. However, Paramount has virtually no financial flexibility and little room for further missteps.

Read more about Paramount’s risk and uncertainty.

Paramount Bulls Say

• CBS is being overlooked. NFL rights, television franchises, and continual leadership in prime-time broadcast television will bring value even if pay-TV subscribership continues declining.
• With a historically weaker streaming platform, Paramount has the right strategy to consolidate entertainment and linear content onto Paramount+ and partner with other subscription services to bring more eyeballs to its content.
• Paramount’s studios remain top-tier for content creation and ownership. Licensing opportunities will be robust if the Paramount+ streaming service fails.

Paramount Bears Say

• Linear television will continue to decline. Even if successful, newer revenue sources like direct-to-consumer streaming will never equal the profitability Paramount once enjoyed.
• Paramount+ significantly trails streaming competitors, and there is little evidence pointing to a change in its also-ran status in a saturated market.
• Movie theaters and the film industry have been permanently changed by streaming and consumers’ preferences to view video entertainment at home, which will reduce the monetization and profitability of the film division.

This article was compiled by Susan Dziubinski and Sylvia Hauser.