Why Wall Street’s Tempered Q2 Forecasts Aren’t Hurting Paramount Stock — Yet

Analysts now see a softening ad market impacting Paramount, but "Top Gun: Maverick" and a big Warren Buffett buy-in are buoying value.
HALO: Pablo Schreiber as Master Chief in HALO set to stream on Paramount+ in 2022. Photo: Paramount+ ©2021 Paramount+. All Rights Reserved. *SCREEN GRAB*

Wall Street analysts are reeling back their expectations for Paramount Global ahead of its Q2 earnings report next month, when several firms expect Paramount+ to report around 4 million net subscriber additions. Compare that with the mountain of subscribers, 6.8 million, Paramount+ added in Q1. And an industrywide advertising slump coupled with subscriber losses at other Paramount streaming services have led Guggenheim to lower its stock-price target for the second time this year.

But don’t think Wall Street is writing off Paramount, which has attracted renewed attention after “Top Gun: Maverick” became the year’s biggest box-office success story and Warren Buffett’s company bought a $2.6 billion stake in Paramount in May. Like Mav in the cockpit, Buffett has a history of knowing what he’s doing.

Paramount outperformed almost all its media peers this year, its stock is down 19.57 percent, bested only by Fox, which is down 11.92 percent. Compare that to Netflix, down over 68 percent year-to-date. Paramount has also outperformed the Nasdaq Composite, on which it is listed; the index is down 26.6 percent this year.

Yet Guggenheim analyst Michael Morris this week lowered his Paramount stock (PARA) price target from $40 to $35 a share, while admittedly maintaining a “buy” rating. He expects Paramount+ to report 4.1 million net adds for Q2, down from his previous expectation of 4.5 million. Similarly, Wells Fargo on Wednesday forecast 4 million net adds for the service (5 million if you exclude the impact of Paramount suspending Russian operations). Wells Fargo’s price target of $60 remains unchanged.

Paramount stock closed at $25.90 Thursday, up 5 percent in the past five days. That’s just north of its 52-week low of $23.69. If you’re following the advice of those two firms (and Buffett’s lead), Paramount Global stock looks like a bargain.

While Paramount+ and free, ad-supported TV (FAST) platform Pluto TV attract most of the attention, Paramount Global has other services in its streaming arsenal — and analysts are expecting bad news there. Wells Fargo forecasts that Showtime OTT, Noggin, and BET+ will lose around 600,000 subscribers. Taking that into account, plus the impact of the Russia exit, analysts are expecting Paramount Global to see just 1.3 million net streaming adds for Q2. (Note: the consensus forecast is 2.7 million ads, but other analysts may follow suit in lowering their own estimates.)

“We think PARA is attractive,” the Wells Fargo note reads. “The big unknown is the ad market.”

A soft advertising market isn’t just a Paramount problem. Analysts say ad budgets are likely to shrink as companies cut costs in preparation for a possible recession. But it’s particularly painful for Paramount, whose Pluto TV is a cornerstone of its direct-to-consumer strategy. “We think FAST ad dollars tend to get reined in first during pullbacks,” Wells Fargo analysts wrote. That, coupled with the impact on linear TV commercials, led the analysts to lower their expectations for Paramount’s total ad revenue by 4.2 percent for the quarter.

Wells Fargo now expects Paramount to report $1.23 billion in Q2 direct-to-consumer revenue, down 3.8 percent from its earlier expectations. That’s driven both by the impact of fewer subscriptions and a weaker ad market; the analysts dropped their Q2 Pluto revenue forecast almost 10 percent from prior estimates.

Tom Cruise plays Capt. Pete "Maverick" Mitchell in Top Gun: Maverick from Paramount Pictures, Skydance and Jerry Bruckheimer Films.
“Top Gun: Maverick”Paramount Pictures

An overall decline in ad spending is bad news for Disney and Netflix — both are planning to introduce ad-supported tiers for their flagship streaming services by the end of the year. And the tempering of Paramount earnings expectations comes as the industry continues to reel from the unprecedented Q1 subscriber slide at Netflix; the streaming leader has warned that more losses are expected this year. In addition to ads, the Netflix comeback plan also has included two rounds of layoffs.

The “chilling effect” from Netflix’s Q1 results is a “big issue” in streaming-centric media companies trading well below some targets, one industry observer told IndieWire for this story. As are macroeconomic fears, like the concern of an upcoming recession, the person, who spoke on the condition of anonymity, added. Paramount believes a diversified media portfolio — from blockbuster films to CBS to Pluto TV and everything in between — and the non-cannibalistic way it handles the specific triangle of theatrical/marketing/streaming is the best way to operate a media company in 2022.

As of March 30, Paramount+ had almost 40 million subscribers. Netflix had 221.6 million, Disney+ (excluding Hotstar) had 87.6 million, HBO and HBO Max combined for 76.8 million, and Peacock had 13 million paid subs (and 28 million monthly active users). Bakish earlier this year said he expects Paramount+ to hit 100 million subscribers by 2024, up from his earlier goal of 65 million to 75 million.

Wells Fargo sees good things on the horizon for Paramount. Paramount+ benefited recently from a deal with T-Mobile, the success of the “Halo” series, and a deal that bundles European streamer Sky Cinema with Paramount+. Overall, analysts expect the Sky deal could bring in 9 million subscribers after the bundle is launched in other markets later this year.

Another bright spot for Q2: Wells Fargo boosted its revenue estimate for Paramount’s filmed entertainment division by 92.6 percent thanks in part to the $1.2 billion gross of “Top Gun 2.” Still sans a streaming date, Paramount — and movie-theater owners — haven’t yet lost that loving feeling for “Maverick.”

Paramount Global will report its Q2 earnings on August 4.

Tony Maglio contributed reporting.

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