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  • Brett Schafer

Not So Deep Dive: Paramount Gobal Stock

Listen On:

  1. Spotify

  2. Google Podcasts

  3. Apple Podcasts

Show Notes

(Ryan) What they do: Paramount Global is essentially a hodge podge of popular media assets that delivers video content across a variety of platforms. Some of the most notable brands include CBS, Paramount, Showtime, BET, ComedyCentral, Nickelodeon, MTV, to name a few.

And each of these brands generates revenue in multiple ways. So there is 1.) Traditional advertising revenue (think ads on cable channels), 2.) Affiliate revenue (fees paid out per subscriber by companies like Comcast or Dish), 3.) Streaming revenue (each brand we talked about also has their own streaming channel – subscription & advertising models), 4.) Theatrical revenue (Revenue from movie theaters. Much lumpier business and makes up a small percentage of overall revenue), and lastly, 5.) Licensing and Other (This is like if Netflix airs Godfather, which is owned by Paramount).

(Ryan) History: Some pretty extensive history here, and I’m not gonna be able to get through everything. But in 1927 (yes, that’s right), a talent agent named Arthur Judson was struggling to find any work for his clients on NBC radio stations, so he decided to form his own network called United Independent Broadcasters. Later renamed Columbia Broadcasting Systems (CBS), after he merged with the Columbia Phonograph and Records Co. After mounting losses he sold the company to their main advertiser, William Paley, who led CBS to become a media juggernaut.

Fast forward to 1952, and CBS broke out a new broadcast syndication division of its company designed to lease CBS’s shows to other stations. This segment was later renamed Viacom and spun-off in 1971 due to regulations that were late repealed. Viacom began building and buying its own media assets. And by 1999, Viacom bought its former parent company, CBS. Only to break up again into 2 publicly traded companies in 2005 due to a stagnating stock price (among other things).

Fast forward again, to 2019, and Viacom and CBS decided they were going to re-merge and rename the company ViacomCBS (only to change it again to Paramount Global 2 years later). Now it’s traded under the ticker PARA.

(Brett) Industry/Landscape/Competition:

  • Global entertainment market estimated to be $2 trillion and steadily growing

  • Global broadcasting and cable TV market at $300 billion in 2019

  • Global streaming market estimated to be $82 billion in 2022

  • Competitors: Netflix, Fox/FoxSports, Disney/ESPN, Amazon, Apple, Hulu, Warner/HBO/Discovery, YouTube, video games, the list is endless. Paramount Global is competing for people’s attention during their leisure time

(Ian) Management and Ownership:

  • Robert (Bob) Bakish is the CEO of Paramount

  • He came from Viacom side

  • Paramount has a segment head model. For instance, a CEO/President of International Networks, Studios and Streaming.

  • Side note: Always feel like these are interesting to watch leadership teams. Lots of potential candidates for new CEOs, etc.

  • Shari Redstone is the chair of the board.

  • Her family has been involved in the media world for years, most notably her father who ran National Amusements prior to her

  • It owns about 10% of the company, and about 80% of the voting power

  • Some legal battles over the years about whether she was in control or her father, cbs shareholders wanted more of a say.

  • Otherwise, insiders own very little

  • Vanguard also owns about 10% of the company and is its largest shareholder

(Brett) Valuation:

  • Market cap $23 billion, ticker PARA

  • Enterprise value of ~$34 billion ($17.6 billion in LT debt, $6.3B in cash)

  • EV/OCF of 40 (explain why this is a good measure to track)

  • Watch out for inflated EV/EBIT number with real estate sale

  • Dilution was decent in 2021 from options/RSUs but granting pace doesn’t look to be heavy at all. Wouldn’t expect much share count dilution to hamper returns

(Ryan) Earnings:

  • In total, they generated $28.6B in revenue in 2021, up 13% from a year ago.

  • Advertising (32%), affiliate (29%), licensing (23%), and streaming about 15%.

  • Every segment grew year-over-year, but streaming grew the quickest at 64%.

  • They are reporting about $6B in operating income

  • But FCF was only about $500M,

  • They have said that they’re investing really heavily in building out their streaming businesses.

  • They reported 56 million to streaming subscribers globally, which is more than double its count from a year ago. (and that comes from all their streaming apps)

  • They upgraded their guidance for 2024 DTC revenue goal from $6B to $9B.

(Ian) Balance sheet and liquidity:

  • $6.3B in cash

  • $17.7B in debt, average interest rate of 4.93% (more than half due after 2030)

  • Paid down about $2B in 2021

  • Say that they will refinance debt if/when they can get lower interest rates

  • Access to $3.5B in a revolving credit facility

  • $2.1B sale of simon & schuster to penguin books

  • Eerily similar capital structure to Netflix, but with longer dated debt.

Anecdotal Evidence:

  • (Ryan) I subscribe to Paramount+ for the soccer rights they have. And I watched Billions on Showtime. But I churn when it’s not in season and I churned when i was done watching billions.

  • (Brett) Can Amazon and ESPN just buy up all the sports rights so I never have to waste money on Paramount+? Overall I don’t understand why I would subscribe to Paramount+ right now. I understand why I would subscribe to Netflix, Dis+, ESPN+, and HBO Max.

  • (Ian) I haven’t used the streaming service. Almost got it confused with comcast.

Future growth opportunities:

  • (Ryan) Sounds like they’re primarily reinvesting any cash they generate into streaming and most notably Paramount+, so I think that has to be their largest FGO. 33M subs, almost triple its figure from a year ago.

  • (Brett) PlutoTV seems to have hit its niche, and I think it can grow globally. But why doesn’t it get displaced by YouTube eventually? What gives it any sort of differentiation? 4.8 billion total viewing hours leads to a lot of advertising slots.

  • (Ian) Moving from big titles on traditional to streaming. Currently young sheldon, yellowstone, and ncis are not streaming on paramount + (hbo, peacock, and netflix respectively. Working with yellowstone creator on a new series. A move in the right direction.

Highlights and lowlights:

  • (Ryan) Highlights: They capitalized on the Bill Hwang incident and raised like $3B in cash at $85/share and they’re selling Simon and Schuster for another $2B, so their balance sheet is in great shape. They also aren’t starting from scratch in streaming. They have a big library of content. Lowlights: I really don’t know what the economics of their streaming business are going to look like in 5 years. I have absolutely no way to know what kind of margins Paramount+ can generate.

  • (Brett) Highlights: PlutoTV, debt structure, solid back catalog of movies/shows, bundling Paramount+ and Showtime, Lowlights: Overall strategy with streaming, lackluster growth in Paramount+ with high churn, very tough competitive position that they put themselves in by not investing in this stuff back in 2015

  • (Ian) Highlights: I think the Paramount name change was smart. I think there is a place for ad-supported streaming. Lowlights: Voting control, especially with less than stellar history. Capital structure / why are you paying a dividend ($600m). Even disney suspended divided (due to COVID), but that cash is meaningful.

Bull case:

  • (Ryan) I think a lot of people are having a hard time valuing this thing, which I guess provides a good opportunity. If the non-streaming segments of their business can decline at a slow rate or even stay flat, and they hit their 2024 guidance for DTC revenue, I think there’s a very real path to $4-$5B in FCF. I think this deserves to trade at 10-15x their FCF. So we’d be looking at good double-digit returns.

  • (Brett) Legacy content/sports/cable shows stabilize, streaming hits maturity 4 - 5 years from now, and PlutoTV continues to be a double-digit revenue grower and wins that free advertising-supported market. If this happens levered free cash flow of $3 billion - $4 billion a year seems achievable. Doesn’t seem too enticing at a current EV of $34 billion but returns would likely be positive. Also, short term buyout potential from Warner-Discovery.

  • (Ian) Snap test. Everyone cares about Young Sheldon, Yellowstone, NCIS, Paw Patrol etc. These are franchises they can leverage over the years and grow the brand. Some of their hits transition from traditional to streaming. Subscriber growth continues

Bear case:

  • (Ryan) They spend a lot of money trying to build out content for Paramount+ that never translates to real user attraction. As an investor, you are making a bet right now that the new content they make is going to be good.

  • (Brett) It’s very simple: The competitors win in the eyes of the consumer. I doubt they will fumble the business model strategy forever but who knows. They expect to spend $6 billion on DTC content in 2024. That feels much too low.

  • (Ian) Snap test. People don’t actually care about it. Do they care about the company? Does it matter? People care about some shows right now, but Paramount does not generate any loyalty to the brand. Netflix is a necessary expense in today’s society. Disney is a beloved brand.

Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get a discount on your first month of the service.

Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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