For Halloween, the equity analysts at Wells Fargo recommend Paramount Global dress up as Fox. We’ll explain.
On Monday, Wells Fargo downgraded Paramount’s stock (PARA) for the second time this month. The first time was October 4, when analysts downgraded PARA from “Underweight” (undervalued, so Buy) to “Equal Weight” (valued appropriately, so Hold) and its target price per share from a healthy $40 to just $19. This morning, Wells Fargo labeled PARA as “Overweight” (overvalued, so Sell) and chopped another $6 off its target price.
So now Paramount is worth just $13 per share in the eyes of Steven Cahall’s team of researchers and number crunchers. PARA closed Friday at $19.02 per share; on the heels of Cahall’s downgrade it declined another dollar (-5 percent) and set a new 52-week low. But there is potentially good news here: Wells Fargo has a way Paramount Global can double its target price per share. And all it would take is one shift in strategy.
Paramount’s content is “undoubtedly valuable,” the guys (they’re all guys) wrote. But they warned that self-distributing the content via Paramount+ and Showtime OTT “may not scale,” which “devalues it since it doesn’t monetize as effectively.” Wells Fargo worries that Paramount+ does not have a “clear path to solid profitability.”
Be like Fox — or perhaps Sony. Wells Fargo thinks PARA stock could be worth $26 if the company adopted an “arms dealer” approach, which is an unfortunate term we’ve all adopted that means creating and selling content for/to other platforms.
Or, be like Lionsgate. Paramount’s studios, like the one that brought us “Top Gun: Maverick,” have an enterprise value of $30 billion, Wells Fargo wrote. Meanwhile, the entire company has an enterprise value of about $28 billion. The clearest path to unlocking value is to sell/spin off pieces of the company, a la Lionsgate, which is entertaining bids for its studio and/or the Starz brand.
“We do not believe these are currently under consideration though,” the sober group of pencil-pushers wrote. With Shari Redstone still the controlling shareholder of Paramount Global, no activist investor could really activate change. So for now, they’re not valuing Paramount Global at a premium multiplier of enterprise value (market cap + cash + debt) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which are generally how analysts arrive at a company’s worth.
A spokesperson for Paramount Global did not immediately respond to IndieWire’s request for comment on this story.
The problem here is not just limited to Paramount’s streaming assets. Lots of mid-size streamers share that same uncertainty as they balance churn, content spend, several revenue streams, scale, etc. The bigger issue is its linear stuff.
While Paramount+ and fast service Pluto TV are getting a piece of the AVOD ad-revenue pie (a slice that will shrink with ad-supported Netflix and ad-supported Disney+ entering the landscape), they are among the channels with the most to lose from growing competition and cord-cutting. Next year’s free cash flow could actually go negative, the Monday note to investors warned. Meanwhile, under the theoretical arms-dealer plan, a $26-per-share Paramount’s free cash flow could be $2 billion.
Without the cash, Paramount may be forced to reconsider sports rights, which appear to be bullet- and market-proof in terms of pricing. CBS Sports has the NFL’s AFC package, SEC college football, PGA Tour golf (including the weekend rounds of The Masters), among other sports rights.
Don’t be fooled by any streaming-subscriber growth we get in the coming quarters, Wells Fargo cautioned, keep your eyes on the prize: the bottom line. Without a shift in strategy, linear losses are likely to drag too much on growing streaming earnings. Come to think of it, it’s actually all a drag.
Paramount Global will report its third-quarter 2022 financial results on Wednesday before the stock market opens.