I rate Paramount Global (NASDAQ:PARA), formerly known as ViacomCBS, as a Hold. Earlier on February 15, 2021, the company announced that it was “bringing together its leading portfolio of premium entertainment properties under a new parent company name.”
Paramount is at a fair valuation deserving of a Hold rating. PARA’s stock is cheap because there are uncertainties relating to the future success of its DTC business and the timing of a potential acquisition bid for the company’s shares.
Is Paramount Stock Undervalued?
It is natural to ask if Paramount stock is undervalued considering its recent share price performance. In the past year, PARA’s shares have corrected by -24%, while the S&P 500 rose by +4%.
Paramount’s Stock Price Performance In The Last One Year
Paramount Global is currently trading at a discount to most of its peers as highlighted in the peer valuation comparison table below.
Peer Valuation Comparison For Paramount Global
|Stock||Consensus Forward Next Twelve Months’ Enterprise Value-to-Revenue||Consensus Forward Next Twelve Months’ EV/EBITDA Multiple|
|Warner Bros. Discovery, Inc. (WBD)||1.2||5.2|
|Lions Gate Entertainment Corp. (LGF.A) (LGF.B)||1.7||18.7|
|Fox Corporation (FOXA)||1.8||7.4|
|Comcast Corporation (CMCSA)||2.3||7.3|
|The Walt Disney Company (DIS)||3.0||15.9|
|Netflix, Inc. (NFLX)||3.1||14.5|
Source: S&P Capital IQ
PARA’s consensus forward Enterprise Value-to-Revenue multiple is the lowest among its peers. The stock’s consensus forward EV/EBITDA ratio is also -20% lower than the peers’ (excluding PARA) mean EV/EBITDA multiple of 11.5 times.
On the surface, Paramount Global appears to be undervalued based on a comparison of its forward Enterprise Value-to-Revenue and EV/EBITDA valuations against its peers. But there are good reasons why PARA’s shares are cheap. As such, I view Paramount’s shares as fairly valued at best, and I will explain why in the next section.
Is Paramount A Value Trap?
Paramount is not necessarily undervalued or a good investment candidate simply because its valuation multiples are depressed. A stock is referred to as a value trap, if its cheap valuations are justified and there are no substantial re-rating catalysts in place.
As per its FY 2021 results presentation, PARA wishes to achieve revenue of over $9 billion for the company’s streaming business in FY 2024 as compared to its DTC sales of $3.3 billion in FY 2021. In other words, Paramount Global hopes to deliver a +40% DTC revenue CAGR in the next three years. This will come at the expense of larger investments in content and reduced profitability in the coming years.
Paramount Global plans to increase its annual spending on content from $2.2 billion in 2021 to more than $6 billion in 2024. This is reflected in PARA’s consensus financial projections in the years ahead. As per S&P Capital IQ data, Paramount Global is expected to see its total revenue grow by a decent FY 2022-2024 CAGR of +6.7%, but the company’s normalized earnings per share is projected to decrease by a CAGR of -9.5% over this forecast period.
Investors are increasingly skeptical about the future growth prospects of the streaming industry. In late April, market leader Netflix reported subscriber losses, which sent the share price of NFLX and its streaming peers including Paramount Global falling. This sends a strong signal that increased content investments do not always equate to subscriber growth and much less bottom line expansion. The market is concerned that Paramount Global will follow in the footsteps of peers like AT&T (T) and Disney which are still struggling to translate an increase in DTC revenue and growing subscriber numbers into long-term profitability after making a pivot towards streaming.
I touch on a key catalyst for Paramount Global in the subsequent section. If that catalyst fails to be realized, PARA will remain a value trap for the foreseeable future.
Is PARA Stock Likely To Go Up In 2022?
PARA stock is only likely to go up in 2022, if an event-driven catalyst materializes. The company’s financial performance in the coming years won’t be good considering that an increase in spending on content to grow its DTC business will hurt its bottom line as highlighted in the preceding section.
As such, investors hoping for Paramount Global’s shares to perform well this year will have to place their bets on a potential acquisition offer for PARA. The media industry has been consolidating, and one recently completed deal was the WarnerMedia-Discovery merger to form Warner Bros. Discovery. As noted in an earlier section of the article, PARA’s forward Enterprise Value-to-Revenue multiple is the lowest among its peers, and this adds to its appeal as an attractive takeover target.
However, it is impossible to predict the timing of corporate action catalysts like mergers and acquisitions. Regulatory issues, capital market access, and financial and economic conditions, in general, are among the various factors that can affect the timing of the realization of such event-driven catalysts.
In summary, I am of the view that PARA will eventually be acquired by another company in the industry. This could possibly happen in 2022, but it might also occur much later.
Is PARA Stock A Buy, Sell, Or Hold?
PARA stock is a Hold.
I view PARA’s shares as fairly valued. Although Paramount Global’s consensus forward next twelve months’ Enterprise Value-to-Revenue multiple appears to be cheap, the market is penalizing the stock for its increased content investments which will lead to earnings contraction in the next few years. In other words, PARA’s shares are justified to be trading at such depressed levels.
On the flip side, Paramount Global is more valuable in the hands of a strategic buyer. This implies that an acquirer in the media space will likely be willing to pay much more for PARA’s shares as compared to what they are trading at today. In a takeover scenario, there could be significant capital appreciation upside for PARA.
There is no guarantee that PARA will be a successful and top-tier streaming player in time to come despite spending much more on content in the next few years. Even if Paramount Global’s DTC business is successful in grabbing a larger-than-expected share of the streaming market, the company might still be less profitable than expected due to the need to continue spending on content investments. In the absence of a takeover, Paramount Global’s future business outlook is uncertain, and this justifies a Hold rating.