UPDATED: Shares of Paramount, the new corporate name of ViacomCBS, took a dive after the media conglomerate told Wall Street that it was more aggressively equipping itself for battle in the streaming wars.
The stock tumbled more than 20% in early trading Wednesday before closing down 17.8%, to $29.58 per share. The drop came a day after Paramount’s 2022 investor day presentation that detailed revised financial forecasts including a bigger capital outlay for its streaming strategy led by Paramount Plus.
Investors were apparently unnerved about the heavier investment Paramount plans to make in the streaming biz — it plans to boost spending on streaming content to $6 billion by 2024, versus $4 billion previously — and the resulting hit to profitability.
Bank of America Securities analyst Jessica Reif Ehrlich downgraded her rating on the stock, from “buy” to “neutral,” and cut her 12-month price target on the stock from $52 to $39 per share.
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“We commend management for taking a bold approach, but near-term headwinds will drive Y/Y declines in CY22 and CY23 OIBDA [operating income before depreciation and amortization] and pressure already depressed FCF [free cash flow] levels,” Reif Ehrlich wrote in a note to clients.
In reporting Q4 2021 results, the company said Paramount Plus netted7.3 million new subscribers to stand at 32.8 million at year end. It also boasted growth of users of the free, ad-supported Pluto TV platform to 64 million monthly active users (up 10 million in Q4). CEO Bob Bakish told PvNew that Pluto TV is “still the most under-valued asset on the planet.”
“While [subscriber additions] have outperformed expectations, and should be robust in 2022, the long-term margin guidance (low/mid 20%) for direct-to-consumer business will not be achieved until the back half of this decade while the legacy business is under continuing pressure,” Reif Ehrlich wrote. She added that Paramount’s investment thesis is “largely predicated on being a potential attractive target” amid broader industry M&A.
At the investor day presentation, CFO Naveen Chopra outlined higher targets for the streaming business, including the higher content spending outlook and direct-to-consumer revenue of more than $9 billion by 2024 (versus previous guidance of $6 billion). He said the peak losses in Paramount’s streaming business would come in 2023. The company by the end of 2024 expects to hit more than 100 million streaming subscribers by 2024 (up from a previous target of 65 million-75 million).
Paramount demonstrated a “greater commitment to streaming” with the decision to window all Paramount Pictures films on the premium streamer after their theatrical runs beginning in 2024, as well as “South Park” starting in 2025, BMO Capital analyst Dan Salmon wrote in a note.
“We think this strategic clarity will ultimately help build long-term value,” according to Salmon, “but we look to gain more conviction in potential upside to near-term expectations and clarity on catalysts over the [next 12 months], as investment remains the primary theme.”
The question for Paramount/ViacomCBS remains whether it will be able to grow profitability and free cash flow to match prior levels, according to MoffettNathanson analysts. “In short, unfortunately, we still did not learn anything to help us believe the answer will be ‘yes,’ at least for the foreseeable future,” the analysts wrote in a Feb. 16 note.
Continued pressure on the economics of Paramount’s linear TV networks will limit overall company growth “even before factoring in expected peak DTC losses in 2023,” per the MoffettNathanson team’s analysis. “While we can see how Paramount Plus with its breadth of content including sports, kids, general entertainment and news offerings helps differentiate the streaming service from its peers, we have a hard time looking at the DTC revenues and investments on a standalone basis.”
CFRA Research analyst Tuna Amobi cut his price target on Paramount stock from $40 to $34 per share, while maintaining a “hold” rating. “We see another transitional cycle of ratcheted streaming investments at Paramount Plus, alongside Showtime OTT and Pluto TV,” Amobi wrote in a note. “We see modest progress on the road to recovery from the pandemic disruption of the ads and TV/film content businesses.”
