Paramount Shares Wobble On Q1 Results; Wall Street Hasn’t Fully Embraced Its Streaming Story

Paramount Global shares were down about 1% midway through the trading day after the company reported a mixed bag of first-quarter results.

The stock initially dropped as much as 7% to near a 52-week low in the opening minutes of the session. Like most other shares in media and many in tech, it remains in the red for 2022 to date, though it hasn’t absorbed as much punishment as others caught up in the complicated challenge of how best to attack the streaming business.

Paramount said it reached 62 million total streaming subscribers for the first quarter, almost 40 million of that Paramount+, but core financials weren’t uniformly encouraging. Still, today’s investor reaction today was moderate compared with that in February, when Paramount held an investor day, announced a corporate rebrand from ViacomCBS and divulged soft quarterly numbers along with anticipated high costs to fuel streaming content. Shares fell more than 20% the following day.

It’s still clear that investors have not entirely bought into the streaming narrative. Like many peers trying to straddle the legacy and digital worlds, Paramount faces a difficult balancing act. It is trying to showcase a streaming operation that still loses money while also no longer having reliably gaudy returns from its traditional assets. The wind has shifted dramatically from two to three years ago, when every legacy player desperately wanted to be valued like Netflix. Now, Netflix’s poor performance and 60% swan-dive in valuation have introduced the very real possibility that streaming may not be such a great business after all — certainly compared with the dual revenue streams of pay-TV.

MoffettNathanson analysts Robert Fishman and Michael Nathanson, in a comprehensive report on the whole media sector Monday, lowered their 12-month price target for Paramount while maintaining a “neutral” rating on its shares. The report outlined the thorny scenario this way: “U.S. consumers are increasingly cutting the cord, not for economic reasons, but because they believe that their favorite content is now broadly available in the streaming universe. Given that exclusive content fuels subscriber growth, it is in the interest of every streaming company to add more content to their mix. Yet, owners of non-news and sports linear networks face a dilemma of accelerating the demise of the sacred cash cows by pushing more value to streaming at the expense of linear.”

Paramount’s TV Media division, whose revenue still makes up more than three-quarters of the company’s total, posted a subdued quarter, though it exceeded estimates on the bottom line. Revenue in the unit fell 6% from the year-ago period, to $5.6 million. Excluding the impact of Super Bowl LV, which was carried by CBS, revenue grew 2%. Advertising revenue fell 13%, and would be up 4% without the Super Bowl.

“We have written and are executing on a differentiated playbook to grow a diversified entertainment company and build a financially attractive business with healthy long-term margins,” CEO Bob Bakish said during a conference call with analysts.

Cord cutting is an ongoing worry for media investors. First-quarter results from major distributors like Comcast and Charter have indicated 2022 could see an uptick in the rate of video subscriber losses this year compared with 2021. Paramount said its affiliate and subscription revenue grew 1% year-over-year, citing higher revenues from rate increases and expanded vMVPD distribution as bright spots but acknowledging MVPD subscriber declines.

When asked about profit margins in streaming — suddenly an urgent question in light of Netflix’s stumbles — CFO Naveen Chopra made the case that Paramount’s diversified portfolio of streaming offerings gives it advantages. “We have the ability to fundamentally change the economics of streaming,” he declared. “We’re the only player that’s truly scaled across broadcast, cable and both pay streaming and free streaming services, and that has real economic benefits for us.”

Library programming is one area where Paramount benefits from a less onerous cost structure, Chopra said. “A lot of pure-play streamers have to spend billions of dollars a year renting library content,” he said. “We have that in-house. Library content is responsible for a large share of viewing on streaming services and it’s critical to subscriber retention.” In addition to using back catalog as a retention tool, Paramount can also get paid by third parties to license it out, Chopra noted. “That’s a significant benefit to our streaming P&L.”

Paramount also saves on marketing, the exec maintained, relative to the tens of millions rivals are spending to support new originals. With franchise-based shows spun off from Star Trek or popular Nickelodeon properties like PAW Patrol, there is existing awareness to tap at lower costs.

Licensing is a fraught process, however. Paramount in years past has leaned toward being an “arms dealer,” opting to sell off Yellowstone, for example, before the series vaulted to No. 1 among all cable shows. Even though Bakish has expressed regret about the move, which preceded the reunion of Viacom and CBS, there are similar encumbrances with other signature properties. While Bakish said talks are under way on a possible new Jackass series for Paramount+, he neglected to mention the release later this month of a new feature installment in the stunt show’s canon, Jackass 4.5. Rather than Paramount+, however, it will stream on Netflix.

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