Paramount Focuses on Earnings Growth But Wall Street Lacks Enthusiasm

The stock of Paramount Global, led by CEO Bob Bakish, was in Wall Street analysts’ focus on Thursday as they dissected its fourth-quarter 2023 earnings report from late Wednesday for signs of its outlook and possible deal future.

As of Thursday morning, several analysts spoke of a stabilization of sorts in Paramount’s business trends, with one suggesting a possible profit bottom may have been reached. But most experts also pointed to challenges for the Hollywood giant, meaning they aren’t ready to turn more bullish on its stock, at least at this stage.

The entertainment conglomerate, controlled by Shari Redstone’s National Amusements, told the Street it expected to deliver “significant total company earnings growth” in 2024 and reach profitability for streamer Paramount+ domestically in 2025, among other things.

Management also touted the opportunity for cutting the cost of film and TV titles in addition to corporate cost cuts via layoffs. “2023 presented an opportunity to experiment with alternative lower-cost entertainment programming across our linear networks,” Paramount CFO Naveen Chopra told analysts on Wednesday. “The performance we saw gives us confidence we can continue to reduce cost going forward while also delivering a consistent volume of high-quality content. And that’s enabled by lower production costs, evolving format mix, and optimizing and sharing content across linear and streaming.”

Paramount shares were up 4.8 percent to $11.59 in early Thursday trading.

“A step in the right direction,” was how Sanford C. Bernstein analyst Laurent Yoon described his conclusions from the Paramount updates. But he maintained his “underperform” rating with a $11 price target on Paramount shares. “Going forward, linear will continue to face challenges and film revenue won’t normalize in 2024, perhaps not even in 2025 due to the lingering impact of the strikes in 2023,” he wrote. “However, these are known risks. What’s encouraging is the progress they’ve made on direct-to-consumer (DTC) since 2022 on both fronts – subs and average revenue per user (ARPU) – and they are likely to continue the trend in 2024 as well driven by international growth, near-term bump in ARPU growth (price hike in the third quarter ’23), and cost controls.”

Yoon also shared his take on Paramount’s plans for reduced content spending. “Paramount is taking a measured approach to control content spend (e.g., more unscripted content that’s cheaper and drives engagement),” the analyst noted. “Their content investment is still sub-scale versus the industry leaders but perhaps sufficient to drive growth at appropriate price points, especially in key international markets with low penetration.”

Concluded the Bernstein expert: “At this point, much of the near-term downside risks are mitigated. While speculations persist, unrealistic M&A expectations are subsiding.” But that was not enough for Yoon to upgrade his rating on Paramount’s stock. “The fourth quarter, and 2023 overall, was definitely a step in the right direction, but we’re still on the sidelines as we don’t see a material positive catalyst to support sustained meaningful growth,” he explained.

Wolfe Research analyst Peter Supino had a similar take. “Management’s confidence in ’24 OIBDA and free cash flow growth were positive, yet with no guide markers to the magnitude, much was left to interpretation on what investors have already been expecting,” he wrote. He reiterated his “underperform” rating and cut his stock price target by $1 to $12 in his report entitled “Swapping More Linear Dollars for Digital Dimes.”

Bank of America analyst Jessica Reif Ehrlich echoes those sentiments in her report “Solid Q4 But Big Questions Still Remain.” In it, she highlighted the company’s “earnings trough in 2023 with growth in ’24,” but reiterated her “underperform” rating and $9 stock price target.

Explained the expert: “While we continue to believe Paramount retains an attractive collection of assets, secular and cyclical headwinds should remain challenging to fundamentals near term.”

Reif Ehrlich’s also shared her take on potential M&A. “Depending on the structure/timing of a potential deal, we believe the benefit to Paramount shareholders is less clear,” she said. “While no specifics on potential partners or timing was provided, Paramount management definitively stated they are ‘looking for ways to create shareholder value. And to be clear, that’s for all shareholders’.”

TD Cowen analyst Doug Creutz had a similarly mixed takeaway, sticking to his “market perform” rating with a $14 stock price target. “We are raising our full-year 2024 revenue estimate from $30.6 billion to $30.9 billion … largely reflecting a better trajectory for DTC,” he noted.

However, Creutz summarized the company’s position within the broader industry with a focus on its challenges despite opportunities. “Paramount Global has some attractive video content assets, including the most-viewed network in the United States. We believe the company has enough high-quality content to continue to survive in an increasingly challenging video content ecosystem,” he explained. “However, the company’s decision to fully commit to competing with Netflix, Amazon, Disney, Comcast, and Warner Bros. Discovery in the general entertainment over-the-top space remains expensive, with little margin for error.”

MoffettNathanson analysts Robert Fishman and Michael Nathanson on Thursday also maintained their rating on Paramount’s stock, “neutral,” while lowering their price target by $1 to $13.

“The rampant speculation over Paramount’s future the past few months led us and others to mark yesterday’s earnings as a key date to learn more about how this might play out,” they shared. “Instead, fourth-quarter earnings have now come and gone without any significant announcement, leaving the focus for the meantime shifting back to Paramount’s fundamental picture and how management is positioning the company to return to growth.”

In their report, entitled “Still Hanging in There,” the analysts expressed concern about the company’s positioning and outlook. “Throughout the noise of headlines over the past several months, the company’s challenged position has not changed,” they argued. “Linear networks are moving in one direction, and it’s not up. DTC losses are abating, but even if one squints very hard, it is difficult to see a path towards real long-term streaming success for Paramount+. Paramount studio can claim some recent victories but still lacks any real cash flow.”

And Fishman and Nathanson warned: “There are still levers to be pulled – more licensing to third parties (despite a weaker market) and further cost-cutting, to name two – but each comes with tradeoffs that place the future growth engines the company is building towards that much further out of reach.”

Concluded the MoffettNathanson team: “in the meantime, management is hanging in there looking to dramatically reduce DTC losses this year while limiting the downside at TV Media with additional cost cuts. There’s really only so much one can hope for as a standalone company, which is why we expect Paramount to continue to aggressively pursue other strategic options.”

Guggenheim Securities analyst Michael Morris noted that Paramount said it passed peak streaming losses a year ahead of schedule and that the fourth quarter marked the “third consecutive quarter of year-over-year improvement in direct-to-consumer-adjusted operating income before depreciation and amortization (OIBDA).”

The analyst’s financial model updates led him to the following conclusion: “Overall, our 2024 OIBDA estimate increases to $2.8 billion from our prior $2.6 billion.” As a result, Morris maintained his “buy” rating and $19 price target on Paramount’s stock.

Analysts beyond Wall Street also commented on Paramount’s latest results and news. “With revenue declines and profitability pressure, Paramount is going to be happy to have 2023 in the rearview mirror,” said Third Bridge analyst Jamie Lumley.

“A silver lining is that Paramount was able to add an additional 4.1 million subscribers in a quarter where it continued to work on paring streaming operating losses,” he highlighted. “With competitors like Warner Bros. Discovery having subscribers leave Max over the course of the year, Paramount is seeing more success in executing on price hikes while maintaining and growing its streaming scale.”

The “big question” surrounding Paramount remains what will happen on the M&A front though, Lumley concluded. “We’ve heard from our experts that a sale of Paramount in parts is more likely than a sale of the whole business. Without a natural buyer for all the various business units, the studio segment could go to a player like Skydance while the linear assets find a home elsewhere.”

The Third Bridge expert also chimed in on reports that deal talks between Warner Bros. Discovery and Paramount have been halted. “A Warner Bros. Discovery merger with Paramount was always unlikely,” argued Lumley. “We’ve been hearing from our experts that the challenges in combining linear assets outweighed the benefits of the combined sports rights and streaming base.”