Following Tuesday’s Closing Bell on Wall Street, Shari Redstone and Bob Bakish had a big announcement to make. ViacomCBS was no more, as the company changed its name to Paramount.
That led Michael Nathanson, the respected Senior Analyst at MoffettNathanson, and colleague Robert Fishman to pen an investor note that asks the tough questions about now-Paramount’s finances for both today and tomorrow.
“Despite the big announcement … we are left with a similar question as we had last year: will the company be able to grow EBITDA and Free Cash Flow again to match prior levels?”
The response from Nathanson and Fishman? “In short, unfortunately, we still did not learn anything to help us believe the answer will be yes, at least for the foreseeable future.”
While the MoffettNathanson analysts can see how Paramount+ helps differentiate the streaming service from its peers, they note, “we have a hard time looking at the DTC revenues and investments on a stand-alone basis.”
Nathanson and Fishman say they expect to revisit their forecast for Paramount after updating their model with the company’s updated disclosure and resegmenting. But, they say, “Even as we digest many of these moving pieces, we continue to believe ViacomCBS Paramount will be challenged to grow EBITDA and free cash flow, ultimately limiting the company’s ability to fully invest behind its streaming efforts.”
Looking at their next few years’ projections, Nathanson and Fishman expect to see revenue growth in mid-to-high single digits (after adjusting for Super Bowl compares).
But, they have lowered their 2022 EBITDA by 15% to $3.8 million.
Furthermore, the reported free cash flow forecast was slashed by 46% to $500 million.
There’s more. MoffettNathanson has also lowered its 2024 EBITDA to $3.9 billion (vs. $4.6 billion previously) — even with the benefit of improved streaming losses.
They conclude, “We have difficultly seeing a return to not only 2019 levels of EBITDA, FCF or EPS from here but even matching 2021.”
Nathanson and Fishman believe Paramount has enough unique content (scripted + sports) to keep growing Paramount+ in the U.S. and benefit from the secular shift in advertising moving to AVOD with its fast-growing Pluto TV. But, they remain cautious on the impact of this growth on the linear business. “Even though we think Paramount’s shift to streaming is necessary given the headwinds the company faces on the traditional business, we still have a hard time seeing how DTC would become big enough to return the total company on a path to growth within the next five years,” they conclude. “While we give the company credit for its DTC subscriber and revenue growth, we see continued pressure on EBITDA and free cash flow as the streaming pivot ramps up and therefore do not expect the
company to receive as much credit for a sum-of-the-parts story.”
As such, MoffettNathanson reiterated its Neutral rating on VIAC and lowered its price target by $4, to $31 from $35, based on blended normalized DTC margin sum-of-the parts ($34) and total company EV/EBITDA ($27) valuation methodologies using our lowered EBITDA estimates.
With less than 20 minutes remaining in Wednesday’s trading session, VIAC was trading at $29.24, down 18.74%. Volume was exceptionally high at nearly 80.1 million shares on average volume of 14.32 million shares.
