Paramount Stock: Can Pay Off In The Long Term (NASDAQ:PARA)

Paramount Global (NASDAQ:PARA) is one of the most misunderstood and cheapest stocks in the market right now. Paramount, formerly named ViacomCBS, holds some of the most storied brands in the media business including Paramount Pictures, CBS, Nickelodeon, MTV, and Showtime. Paramount also includes two of the fastest growth brands in the streaming space with Paramount Plus and Pluto TV. The combination of Paramount’s current valuation and its growth prospects make it one of the best candidates to deliver market beating returns over the next decade.

Paramount’s Current Valuation Justifies a 4 Times Increase in its Stock Price from a Re-Rating Alone

The first pillar of my thesis on why Paramount Global will be a 10-bagger (10 times current stock price) over the next decade, is the extremely cheap price at which the stock is currently selling for in relation to its current actual earnings power.

The market capitalization of Paramount Global is currently $12.8 billion. The average yearly net income over the past 4 years since Viacom and CBS re-merged to form this company is $3.3 billion (2018: $3.4 billion, 2019: $3.2 billion, 2020: $2.3 billion, 2021 – $4.4 billion). According to historical earnings power, the stock is currently trading at a price to earnings ratio of 3.85. The stock market average over the long term is closer to 15 times earnings. Assuming these earnings remain the same or improve, a re-rating to a regular market multiple of 15 times earnings would lead to Paramount stock increasing by 4 times its current price.

Paramount Global has earned an average annual revenue of $27.2 billion dollars over the past 4 years (2018: $27.3 billion, 2019: $27.8 billion, 2020: $25.3 billion, 2021: $28.6 billion). Based on this average revenue and the current market cap of the company, Paramount is currently trading at a price to sales ratio of 0.47. For reference to other media companies, Netflix (NFLX) trades at a price to sales ratio of 3.4, Disney (DIS) trades at a price to sales ratio of 2.2, Warner Bros. Discovery (WBD) trades at a price to sales ratio of 0.67.

I believe the entire media sector to be trading at a discount to intrinsic value due to the uncertainty with streaming profitability and worries about an advertising slowdown. If Paramount traded at just 2 times sales, the stock would increase by 4 times its current price. The margin of safety is present in Paramount’s stock and even Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B), the most famous value investing company, bought into Paramount at even higher prices earlier this year.

Growth Prospects for Paramount Streaming Will Further Increase Revenues and Earnings

The predecessors to Paramount Global (Viacom and CBS) included older legacy brands with great consumer appeal, but very little growth. The combination of the companies under Shari Redstone and Bob Bakish has led to a very powerful strategy for growth using legacy assets very effectively to drive streaming growth.

The market is under-appreciating Paramount management’s strategy of embracing the full spectrum of Netflix-like streaming using Paramount Plus, free ad supporting streaming with Pluto TV, and a hybrid using Paramount Plus with commercials at a lower price point. Total revenues from Paramount’s streaming services increased from $2.5 billion in 2020 to $4.2 billion in 2021. For the first 2 quarters of 2022, streaming revenues are up 67% year over year. If revenues continue to grow at that pace for the rest of the year, 2022 will have streaming revenues of $7 billion.

The impressive thing about this streaming growth, is that it is not coming at the expense of traditional media revenues (broadcast and cable) as those segments have been growing slightly as well. For Paramount shares to multiply by 10 over the next decade, earnings per share would have to increase to 2.5 times current levels (9.6% compound annual growth rate) in conjunction with the 4 times increase for a normalized valuation. Considering the continuing growth of Paramount Plus and Pluto TV discussed below, I think this is within reach for the company.

Paramount Plus

Paramount Plus is the company’s flagship streaming service and was named the fastest growing brand in United States in 2021 by Morning Consult. The numbers back up the claim as well. Paramount Plus has gone from 16.5 million subscribers in Q1 2021 to more than 43 million subscribers in Q2 2022 accord. That is 160% growth in a little over a year! The growth to date has been impressive and has beaten the estimates of analysts and media observers as most thought Paramount needed to sell out to a larger streamer to compete. I believe that management’s strategies to grow Paramount Plus into a global streaming leader are not well recognized and will lead to continued growth in the next decade.

In the United States, Paramount Plus is a broad service that includes sports (NFL, UEFA Soccer), news, and a large variety of entertainment from the company’s key brands (Paramount movies, CBS broadcast shows, Nickelodeon content for kids, reality programming from MTV, Yellowstone spinoffs from Taylor Sheridan, and original series such as Halo and Star Trek shows). Showtime premium shows are also available to layer on to Paramount Plus subscriptions for a small additional price.

The company currently has an ad-supported tier at $4.99, an-ad free version at $9.99, and a combined offering of ad-supported Paramount Plus with Showtime for $11.99/month. The variety of options and price points has led to growth as people can choose the option that they are happiest with and the company can make similar money from the customer who is happy with ads compared with a customer who wants no ads and is willing to pay a higher price. When Paramount unveiled Paramount Plus, people were skeptical of the broad offering and the ad-supported tier. These features are now becoming standards in streaming as Netflix is adding an advertising tier and Apple and Amazon are adding sports.

In addition to the general momentum of Paramount Plus, an additional tailwind for domestic Paramount Plus growth is a recent partnership between Paramount and Walmart whereby Paramount Plus is bundled with Walmart’s Walmart + membership service. In recent interviews, Paramount CEO Bob Bakish has expressed that this partnership is already leading to more new sign ups than Paramount management had expected.

Paramount Plus international growth strategy is not well understood by industry commentators but it is very smart and will lead to subscriber and revenue growth over time. Two key competitive advantages for international growth of Paramount Plus are 1) Paramount’s use of hard bundles with strong international partners and 2) the use of free broadcast and streaming services to promote Paramount Plus.

Paramount is leaning into powerful partnerships that have resulted from operating in the broadcast and cable television industry for decades internationally. Just as Paramount is partnering with Walmart in the US to get subscribers jointly, Paramount is partnering with the most powerful media company in Europe (Sky), the most powerful company in India (Reliance Industries), and one of Korea’s largest entertainment companies (CJ ENM). Paramount is forming “hard bundles” between Paramount Plus and these top local media companies so that customers can access Paramount Plus automatically in conjunction with other powerful content for a combined price. This will drive customer growth much more efficiently than if Paramount was to try to win in every market alone and the resulting customers will be stickier as they are bundled in with other important services.

Another key competitive advantage Paramount has in growing abroad is that it controls key free broadcast networks (like CBS) in the UK, Australia, Chile and India. These “free to air” broadcast networks (combined with Pluto TV discussed below) have wide reach in their respective countries and are being used very effectively to promote Paramount Plus by running advertisements or premiering Paramount Plus series.

Pluto TV

The second key pillar of the Paramount growth story is Pluto TV, Paramount’s “free ad-supported tv” service. If you have not used Pluto TV before, check it out at Pluto.TV. Pluto requires no login, no payment, and minimal decision making for someone with any internet connected device to start watching something fun. The content currently skews to older re-runs of popular shows and movies and content typically reserved for late night cable tv channel surfing. Pluto TV is geared for a different kind of consumer than Paramount + or other paid subscription services. Pluto is designed for a large number of people who want to be entertained but do not want to pay for multiple streaming services. Pluto consumers love the lean back experience of having television on without having to make too many decisions or pay for a cable subscription.

Pluto TV was acquired by Viacom in 2019 before the recombination with CBS for $340 million dollars. Since then, revenues for the service have gone from $70 million to over $1 billion dollars in 3 years! These revenues are solely from advertising since users do not pay any money. The “monthly active users” of Pluto TV have increased from 12 million in 2019 to over 70 million as of the latest earnings report in 2022. This growth should continue over the next decade as people get less comfortable paying for lots of paid streaming services and the company continues its international expansion.

Pluto TV is a very underrated asset in today’s media landscape. As the next decade moves forward, Pluto can become synonymous for “TV” for many households that want to be entertained without paying large monthly fees. As Pluto gets larger and more important, the quality of content should continue to increase and Pluto may become more powerful than leading paid streaming apps in many countries where paying for content is not the norm.

Risks

The biggest risk to this thesis is that the traditional media ecosystem erodes much faster than expected and that the new streaming contributions do not make up for the lost earnings for the cable bundles that are the heart of Paramount’s current earnings. I believe this fear to be reflected in the valuation of the company and I think Paramount management is dealing with this transition well. Another risk brought up by many in the investor community is Paramount’s high debt levels. Currently Paramount’s long-term debt is $15.7 billion. Due to strong financial management by Paramount, this debt is relatively low interest and spread out nicely with due dates as far out as 2062. There is only about $170 million of debt due before 2025 and Paramount has cash on hand of $4 billion. I believe these two risks are reasonable but not deserving of the extremely low valuation of the company at present.

Conclusion

Paramount Global is currently trading at one-fourth of its normalized earnings power and is poised to grow revenues and earnings steadily over the next decade due to the success of global streaming platforms Paramount Plus and Pluto TV. Investors are currently worried about very short-term issues with Paramount when they should be looking at the potential to own a globally significant entertainment company with strong growth potential in streaming at 75% discount to its true current value. Readers of this article who take advantage of today’s distressed prices, can have a stock that multiplies 10 times in 10 years.