Expanded Theatrical Slate And Rising Content Spend Will Pressure Future Margins

Catalysts

About Paramount Global

Paramount Global is a media and entertainment company spanning film, television, streaming, gaming, news, and sports.

What are the underlying business or industry changes driving this perspective?

• The plan to expand theatrical output from roughly 8 to at least 15 movies per year beginning in 2026 increases exposure to box office volatility and content underperformance. This could pressure studio revenue and compress margins if projects do not recoup rising production and marketing spend.
• Incremental programming investments in excess of US$1.5b across theatrical and direct to consumer platforms, layered on top of existing content budgets, raise the bar for content ROI. These investments could weigh on earnings and free cash flow if subscriber growth or licensing revenue does not keep pace.
• The ambition to rapidly scale Paramount+ globally through heavier content and technology investment, including convergence of three separate streaming tech stacks, introduces execution and timing risk. This could limit ARPU gains and delay segment margin improvement.
• Reliance on high cost, premium sports and combat sports rights such as UFC and Zuffa Boxing to support year round engagement concentrates risk in a single content category. This may strain content expense lines and keep net margins under pressure if price increases or advertising revenue fall short.
• The push to become one of the most technologically capable media companies through initiatives like Oracle Fusion integration and expanded use of artificial intelligence requires sizable upfront spending and complex implementation. This can drive higher operating costs and cause a near term drag on earnings and free cash flow if efficiency benefits arrive slower than planned.

Assumptions

This narrative explores a more pessimistic perspective on Paramount Global compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Paramount Global's revenue will decrease by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.1% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $966.5 million (and earnings per share of $1.38) by about January 2029, up from $-19.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.7 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.2x on those 2029 earnings, up from -391.8x today. This future PE is lower than the current PE for the US Media industry at 14.1x.
• The bearish analysts expect the number of shares outstanding to grow by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.01%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The combined Paramount and Skydance assets give the company a wide mix of film, television, animation, gaming, news and sports IP, and management is explicitly orienting this toward scale and long-term growth, which could support steadier revenue and earnings than a purely legacy media model might suggest.
• Management is targeting total revenue of US$30b and adjusted OIBDA of US$3.5b in 2026 and has lifted its run rate efficiency goal from US$2b to at least US$3b. If these cost and efficiency plans track to guidance, net margins and free cash flow could look stronger than a bearish share price view assumes.
• Paramount+ has reached 79 million subscribers, with the company highlighting strong growth in direct to consumer revenue and profitability. If global scaling, higher engagement and potential ARPU gains continue, that could provide a sustained tailwind to segment earnings and group revenue.
• The planned expansion of theatrical output to at least 15 films a year and more than US$1.5b of incremental programming spend across film, streaming, sports, news and gaming, combined with high profile talent partnerships, could, if content resonates, support higher long run studio revenue and potentially better operating margins than a bearish case builds in.
• Long term technology initiatives, including converging three streaming tech stacks, rolling out Oracle Fusion across the enterprise and broader use of artificial intelligence as an efficiency tool, are aimed at improving user experience and internal decision making. If executed well, these initiatives could reduce operating costs and support higher earnings and free cash flow over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Paramount Global is $8.5, which represents up to two standard deviations below the consensus price target of $12.09. This valuation is based on what can be assumed as the expectations of Paramount Global's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $27.7 billion, earnings will come to $966.5 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $11.04, the analyst price target of $8.5 is 29.9% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.