Aggressive Streaming Expansion And Sports Bets Will Pressure Margins And Limit Long Term Upside

Catalysts

About Paramount Skydance

Paramount Skydance is an integrated global media and entertainment company focused on film, television, streaming, sports and interactive content.

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

• The aggressive plan to grow theatrical output to at least 15 films per year starting in 2026, combined with more than $1.5 billion of incremental programming spend, risks oversaturating a slowing box office and fragmenting audiences. This could depress returns on content and pressure adjusted OIBDA.
• Heavy reliance on scaling Paramount+ in an increasingly crowded streaming market, while converging three legacy tech stacks onto one platform, creates substantial execution and timing risk. This could limit subscriber growth, constrain ARPU expansion and delay D2C margin improvement.
• The push to become one of the most technologically capable media companies, including large-scale cloud, Oracle Fusion and AI investments, could drive long implementation cycles and cost overruns. This may erode the targeted $3 billion efficiency run rate and keep net margins structurally lower than expected.
• The strategy to use premium sports, particularly UFC and Zuffa Boxing, as year round engagement drivers may backfire if cord cutting accelerates and advertising shifts lag expectations. This could result in rights costs growing faster than incremental subscription and ad revenue.
• Plans to transform CBS, Pluto and key cable brands into a coherent global digital ecosystem depend on successful brand migration and advertiser adoption. If linear erosion outpaces digital monetization, overall revenue growth and free cash flow generation could fall short of 2026 guidance.

Assumptions

This narrative explores a more pessimistic perspective on Paramount Skydance 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 Skydance's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.9% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach $669.0 million (and earnings per share of $0.61) by about December 2028, up from $-272.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.5 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 30.3x on those 2028 earnings, up from -59.1x today. This future PE is greater than the current PE for the US Media industry at 15.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is aligning significant new content investments with proven creative engines such as Skydance, Paramount Pictures and high profile talent like the Duffer Brothers and James Mangold. If successful, this could produce a slate of global hits that structurally uplifts box office, licensing and streaming content revenues over the long term.
• Paramount Skydance is rapidly scaling its direct to consumer platforms, with Paramount+ already posting strong subscriber and revenue growth and targeted ARPU improvements. Continued global expansion and higher engagement from premium franchises could drive sustained top line growth and operating leverage in earnings.
• The convergence of three separate streaming stacks, deployment of Oracle Fusion and increased use of AI and advanced ad tech may materially improve user experience, advertising monetization and enterprise wide efficiency. This would support higher net margins and stronger long term free cash flow than currently expected.
• Year round tentpole sports such as UFC and Zuffa Boxing, combined with the enduring strength of CBS and the strategic use of Pluto in low ARPU markets, could create a powerful ecosystem that stabilizes linear declines while accelerating digital viewing. This would underpin resilient advertising revenue and margin expansion.
• Management’s explicit focus on achieving investment grade metrics, deleveraging and extracting at least $3 billion of efficiency run rate, alongside opportunistic divestitures of noncore assets, may strengthen the balance sheet and enhance cash conversion. This would support higher earnings multiples and a stronger long term share price.

Valuation

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

• The assumed bearish price target for Paramount Skydance is $12.0, which represents up to two standard deviations below the consensus price target of $15.21. This valuation is based on what can be assumed as the expectations of Paramount Skydance'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 $12.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $30.3 billion, earnings will come to $669.0 million, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $14.64, the analyst price target of $12.0 is 22.0% 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.