SVB MoffettNathanson last week held its inaugural Technology, Media, and Telecom Conference in New York.
As part of that event, the six analysts in the finance house’s Media & Communications vertical on Thursday (5/18) hosted a best ideas presentation, with each analyst presenting their favorite idea – long or short – in their respective sub-sector.
Robert Fishman pitched Paramount Global.
With an “underperform” rating and a price target of $12, the owner CBS News & Stations has been battered in recent weeks on Wall Street. With Monday’s Closing Bell, shares in Paramount were at $14.99, down 1.2% yet still above where SVB MoffettNathanson expects it to be at the end of 2023.
With a $0.05 cash dividend declared and an ex-dividend date of June 14, is there something for investors to get it in at perhaps a value price, however?
Not exactly. Fishman took a look. He calls Paramount’s Underperform rating “our best idea.”
What would contrarians have to say to that? “You might be thinking, the stock has already essentially blown up, is there more room to go? We’re going to show you why we think there is,” he asserted.
First, over the last 12 months, the Underperform rating from SVB MoffettNathanson “has clearly worked.” In fact, Fishman noted, the only stock “that has grown off the lows is Netflix, essentially doubling. Paramount has performed among the worst in our universe, but we’re going to show you why this should continue.”
How does Fishman arrive at such an unfavorable conclusion for Paramount? “A lot of focus from the company is on Paramount+ and the success that they’re having on their direct-to-consumer pivot,” he explained. “In 2022, DTC revenues represented only 16% and that’s with the success they’ve had up to that time. TV Media, which is driven by the linear networks, is still over 70% of the company. Using our forecast, we still have TV Media at over 60% of the company’s revenue and DTC growing to just over a quarter of revenue.”
With linear advertising and affiliate fees again the majority of what Paramount Global still is today and what it’s likely to be a few years from now, the performance is not as ugly as some would tend to believe — right? “Advertising had been relatively stable across the linear networks, and affiliate fees too have surprisingly grown slightly,” Fishman said.
Now comes the bad news. “What we’re forecasting for the next three years is a deceleration of these trends. We project advertising revenue to drop by over $1 billion, and that’s being driven by not just the macro, but all of the linear viewership today that is essentially going away. On the affiliate fee side, we have probably an optimistic picture here, where affiliate fees are set to decline, and retrans staying stable and essentially offsetting a lot of the cable network portfolio declines.”
That is “probably a best case scenario that we’re laying out,” with cord-cutting acceleration a big worry. Then, there’s the reality that direct-to-consumer ad growth, while growing by nearly 70% over the past three years, is coming off of a very low base. “Total DTC revenues are still only going to be a little more than half of the total linear revenue,” Fishman shared.
And, that point is probably the biggest takeaway for Paramount Global, which has staked its future on Paramount+. But, perhaps it has taken its eye off of its bigger profit-generating content delivery vehicles, with peak losses for Paramount’s D2C businesses forecast for 2023.
“We have that jumping to over $2 billion this year,” Fishman said. “The reality is we still don’t see a real path to profitability. The company has not really laid out any sort of clear timing, and while they have given long-term targets in terms of getting to TV Media margins, we just don’t think that those are realistic any time soon, so we have the losses continuing over the next couple years especially as the company is continuing to lean in on the streaming pivot.”
What’s Fishman’s conclusion?
“What we tried to lay out here is why we think Paramount has more downside risk despite the decline we’ve seen to date,” he concluded. “We’re still Underperform with a $12 price target.”
That represents about 20% downside from where Paramount Global stock was on May 18.
