Paramount: Patient Leadership, Popular Content, Buy (PARA)

What’s Obvious

Paramount’s (NASDAQ:PARA) release of Top Gun: Maverick was a huge win. Here’s what leadership had to say:

“Nowhere is our popularity more evident than at the box office,” president and CEO Bob Bakish told analysts. “Look no further than Top Gun: Maverick, which is already the biggest film was 2022 and our fifth No. 1 title this year. In fact, Top Gun: Maverick just cleared $1.3 billion at the global box office and became one of the top 10 domestic movies of all time. Here we leveraged our portfolio brands, including CBS and MTV, to execute a major company consumer campaign that resonated with audiences everywhere, a strategy that has proven to be highly effective when deployed against our major assets.”

I last covered Paramount in Feb 2022. What’s less well known are the other four No. 1 films of 2022:

• Jackass Forever
• Scream
• The Lost City
• Sonic the Hedgehog 2

In any event, most investors forget that PARA held back on the development and release of Top Gun: Maverick for quite a while.

Finally in 2010, Paramount began development for a sequel to the beloved aviator action drama movie, with Tony Scott being approached to direct again before his death. Tom Cruise and Val Kilmer had been enthusiastic about reprising their roles since the beginning, so producer Jerry Bruckheimer still remained dedicated to getting the sequel made. After eight years in development, Top Gun: Maverick finally began filming in 2018, with a release date that was originally set for July 2019.

Eight years! Then, due to COVID-19, it was delayed. Again and again. The reasons are quite simple. Tom Cruise dug in his heels, pushing back, to make sure the timing was right. He refused to allow the movie to go direct to streaming. Also, the stakes were sky high (pun intended) due to the $152 million budget.

The first big point is that PARA was smart to wait for the right opportunity with the right timing. Despite the hard pushback, PARA has delayed nearly all of their new releases. In short, PARA has demonstrated restraint and patience. This is a sign of long-term vision versus short-term greed.

What About Streaming?

In short, the plan is working.

Q2 showed a company that it’s taking market share in streaming, in broadcast, in box office and in upfront dollars. It also serves as a company increasing its penetration of the most important growth market in media streaming, as evidenced by our over 5 million D2C subs added in the quarter.

Quite appropriately, PARA isn’t all-or-nothing about streaming. Not by a longshot. Instead, streaming is seen as part of the puzzle. There is a tapestry here, not just one or two levers being pulled. Here’s a good take:

Part of the reason is that we don’t just make popular content, we also make content popular by leveraging our powerful platforms. After all, to drive best-in-class marketing and distribution, you’ve got to have best-in-class assets, like the #1 broadcast network in America, the largest broadcast footprint globally, the #1 free ad-supported streaming TV service in the U.S. and one of the fastest-growing premium SVOD services.

Let’s tear this apart.

1. The content is popular and high quality.
2. There are multiple platforms at work.
3. The monetization is done via direct sales, subscriptions, ads, and more.

In Q2 2022, Paramount+ added 4.9 million global subscribers and revenue grew 120%. Off the top of my head, I’m not sure it’s the #1 fastest growing streaming service. However, I know for a fact it’s one of the best, and one of the fastest of them all.

But is this growth for the sake of growth? That always worries me. It’s easy to grow, but it’s not easy to grow and generate profits, or at least small losses. In any case, the answer is clear:

Later in the year, we’ll do the same with Sky in Germany, Austria and Switzerland, and with CANAL+ in France. Meanwhile, in markets like India and Eastern Europe, we’re focused on balancing long-term market growth with a smart allocation of capital.

As exemplified by our deals with Viacom18 and Reliance, with whom we’re partnering to bring Paramount+ to India and with our Sky Showtime partnership with Comcast, which will launch later this year. By the end of the year, inclusive of Paramount+ and Sky Showtime, we expect to have our subscription video-on-demand services in 60 total markets.

It’s not hard to see that PARA is being aggressive, but not stupid about growth. Again, I see a long-term vision, with very satisfactory execution from quarter to quarter. PARA is willing to wait, but they are still generating excellent growth, around the globe.

Wrapping this up, as of the end of June, there were about 64 million D2C subscribers, which includes about 43 million Paramount+ subscribers. For what it’s worth, that reflects the removal of about 4 million D2C subs in Russia and about 1.2 million of those were Paramount+ streamers.

There’s plenty more that could be added. What’s most important here is that PARA leadership again is showing their strength. Carefully yet aggressively growing the business; profitable waiting is working.

Quick Numbers

Keep in mind that right now, creating new content, and growing subscribers, is very expensive. It’s absolutely impacting the bottom line. However, there’s some outstanding news to share.

First, CEO Bob Bakish had this to say:

Paramount continues to build momentum with the assets, strategy and ability to compete—and win. In Q2, we grew total company revenue by 19 percent and took market share in streaming, in broadcast TV, in box office and in upfront dollars, all while increasing our penetration of the most important growth market in media—streaming.

Fine. But, how about profits? Well, good stuff. Q2 Non-GAAP EPS was $0.64, which was $0.02 over analysts’ estimates. Furthermore, see Page 4, because PARA tells us that there’s $4.0 billion on the balance sheet. No worries.

The yield is great at almost 4%. I know the dividend is stressed given the high investments in content and the current cashflow. But, it is what it is. Spending won’t stay high forever. There’s somewhere between $1.5 billion and perhaps $2.5 billion in profits hiding behind the spending in the future. That’s a rough estimate but it’s likely to be close enough to know PARA is going to be fine.

Wrap Up

I am largely in alignment with leadership. The long-term game is the winning game. Leadership is being patient and I am keen on being patient as the streaming wars play out and we see either consolidation or decreased spending on content. Perhaps both.

I am also willing to wait in terms of content distribution and releases. Many times PARA has decided to push around dates to optimize sales and profits. It’s working. I’m not going to start second guessing or complaining that PARA needs to speed up even more. The results speak loudly.

Clearly the threats include other streamers, like Disney (DIS) and Warner Bros. (WBD). There are many entertainment choices, of course, but I’d argue that PARA is in many markets, using many different platforms to connect with customers and subscribers. Again, I’ll patiently wait as PARA rolls out the content in the right places, at the right times.

While my situation isn’t your exact situation, I can tell you what I’m doing. It’s simple: I’m buying PARA. It’s getting most of my new money right now, along with Alphabet (GOOGL). I see PARA as very undervalued and I’m happy to collect nearly 4% as I wait. Like other investors, like PARA leadership.