Direct-to-consumer Transformation Will Unlock Digital Media Opportunities

Key Takeaways

• Paramount's D2C growth and content expansion are set to enhance revenue, profitability, and global market share with strategic partnerships for stability.
  
• Transition to digital advertising, innovative strategies, and content management may improve net margins and boost free cash flow and earnings.
  
• The scalability challenges of Paramount+ and declining TV and linear advertising revenues pose risks to future overall revenue and profitability growth.

Catalysts

Operates as a media, streaming, and entertainment company worldwide.

• Paramount's progress in transforming their direct-to-consumer (D2C) segment, with Paramount+ achieving significant growth in subscribers, engagement, and revenue, is likely to enhance future revenue and profitability.
  
• Continued expansion of Paramount's strong content slate, including successful franchises and original series, is expected to drive international growth, possibly increasing global market share and boosting revenue.
  
• Strategic distribution deals with partners like Comcast and YouTube TV are expected to stabilize affiliate revenues, even as linear ecosystem trends present challenges, potentially resulting in resilient revenue streams.
  
• The ongoing transition of advertising from linear to digital, paired with the expansion of client bases and data capabilities, may stimulate growth in D2C ad revenue, improving overall net margins.
  
• Slate financing and strategic content management, including leveraging franchises and structuring innovative windowing strategies, could reduce production costs and enhance free cash flow and earnings.

Paramount Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Paramount Global's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -21.3% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.6) by about May 2028, up from $-6.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.4 billion in earnings, and the most bearish expecting $712.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Media industry at 16.8x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.3%, as per the Simply Wall St company report.

Paramount Global Future Earnings Per Share Growth

Risks

• There is uncertainty regarding the full scalability and competitive ability of Paramount+ as a stand-alone service against larger SVOD platforms, which may affect future subscriber growth and subscription revenue.
  
• The impact of recent renewals and an evolving pay TV ecosystem may lead to increased decline in TV Media affiliate revenue, potentially impacting overall revenue growth.
  
• Linear advertising revenue faced a decline due to ecosystem trends, which may persist as linear audiences continue to decline and could negatively affect total advertising revenue.
  
• The integration of Showtime into Paramount+ has temporarily diluted subscription revenue growth, which could impact the company's overall revenue and profitability goals.
  
• Expenses related to variable compensation and actions to mitigate 280G exposure were higher than expected, which could pressure operating income and net margins in the future if not managed carefully.

Valuation

• The analysts have a consensus price target of $12.749 for Paramount Global based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 9.3%.
• Given the current share price of $11.75, the analyst price target of $12.75 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.