Seeking Alpha • Jul 29
Paramount Vs. Fox Stock: Which Is The Better Buy?
Fox and Paramount have each transformed themselves into fundamentally different companies, taking completely opposite paths.
Both companies have relatively low P/Es, but at 18, Fox's is almost normal. Paramount is at 9.5 on a forward basis and a ridiculous 4 on a trailing basis.
Fox is doubling down on pay-TV. Fox's strategy allows it to continue to tap monopoly pay-TV profits, but does at the risk of leaving it severely exposed to pay-TV's collapse.
Paramount is doubling down on streaming, and has managed the unique feat of creating a sports portfolio that can profit standalone. It is well diversified and protected from external threats.
Fox's profit may be mostly or even entirely stemming from Fox News. This single profit source, combined with the risk of its sports deals in a non-pay-TV setting, make Paramount the better buy.
It's amazing what a difference just a few short years makes. For decades, Fox Corporation (FOX) and its predecessors were so akin to Paramount Global (PARA) or more accurately its two predecessors, CBS Corporation and Viacom that to compare them was almost to embody that old saw about six and a half dozen.
But since 2018, Fox has sold out of scripted content and Paramount Global has dived headlong into paid streaming. Today, these are two very different companies, even though the market continues to bid them to similar market caps and Enterprise Values.
So which one should investors take?
Fox and Paramount Key Metrics
I want to focus on the operational prospects, so I will just briefly recap here. Fox is currently trading at a trailing P/E of almost 18, with just shy of $22 billion in Enterprise Value. Paramount, meanwhile, trades at a ludicrous trailing P/E of just over 4, although its forward P/E is a slightly less ridiculous 9.5. It's Enterprise Value is at just under $30 billion. Paramount's dividend yield is currently close to 4%, while Fox's is a more pedestrian but respectable 1.5%.
General Company Operational Strategies
As I said, Fox and Paramount have diverged dramatically. The merger between Fox and Disney left behind a much smaller, leaner Fox Corporation consisting almost entirely of news & sports. Paramount Global, meanwhile, has not only merged with the first broadcast studio to launch a streaming service with a live broadcast signal; it went on to buy a 49% in the Miramax studio and its scripted library while selling non-scripted assets like Simon & Schuster publishing and the CNET Media Group, as well as, reportedly, part of its stake in the CW Network.
This is a reflection of their broader strategic postures; Fox is all in on pay-TV and Paramount is rapidly starting to look all out on it, or at least utterly indifferent to its fate. In streaming their postures are almost exactly reversed.
Operational Profiles
Paramount and Fox take different approaches to each of the key segments of modern televised entertainment: News, Sports, free streaming, paid streaming, and content production
Free Streaming
So-called FAST (Free Ad-Supported TV) streaming is the one space that Fox and Paramount both seek to continue to occupy. In fact, their respective FAST operations, Tubi and Pluto TV, are probably the first and second place champions in the space - though there's a real argument to be made that Amazon's Freevee sits among them as well.
Paramount's Pluto TV is undoubtedly the largest FAST service, just cracking $1 billion in revenue and turning profitable at the end of last year. Fox's Tubi is reported as part of the broadcast operation and doesn't report separately, but it has been showing strong growth as well. Tubi had 25 million active users around the time the deal closed, 33 million at the end of 2020, and had just crossed 50 million at the end of March 2022. Tubi negotiated a deal to penetrate the hotel entertainment sector - where people are sometimes separated from their usual entertainment options - and in its most recent earnings call Fox management reported that time streaming grew by 50% in Y/Y.
However, for investors excited by these milestones, this may be somewhat of a red herring. These operations, while significant, are probably not enough to fundamentally move the needle at either company. As I've argued before, traditional media companies almost always lack the detailed customer profiles necessary to target advertisements as precisely as Google or Amazon, who can use search and purchase history to great effect. This means that they often need to run higher ad loads to produce the same revenues, which is a problem because when they're all free FAST services increasingly compete with each other by promising lower ad loads than their competitor.
Fox and Paramount certainly do derive a benefit from the fact that these services are showcasing their respective content libraries - though that's more relevant for Paramount than it is for Fox post-Disney merger - but that is more properly a benefit assigned to content production, which we're coming to presently. They could derive those same profits by selling to another FAST service. To profit from operating a FAST as such, you need to be great at advertising targeting, and its unlikely they will ever be better at it than the tech giants.
I often get told my media company analysis is incomplete because I don't talk about FAST more, but I give this sector little weight in my deliberations.
Paid Streaming
Despite their overlap in free streaming, the two companies have adopted very different approaches to the paid streaming market, in the sense that Paramount has one and Fox doesn't.
Well, Fox does have Fox Nation, a small $5.99 per month streaming service that doesn't report subscriber figures and offers mostly documentaries without scripted content or any of Fox's sports properties. Those things all remain exclusive to the pay-TV side.
Paramount, however, made revamping the old CBS Access and relaunching it as Paramount+ its first order of business after the merger, and has infused the service with not only its own shows, but also licensed content from other studios. Paramount+ elbowed Hulu and Amazon out of the way to sign an exclusive sub licensing deal with the Epix premium channel and hasn't been shy about sending some potential major blockbuster movies straight to Paramount+, though management insists it remains committed to the highly asymmetrical theater system. And of course, the service will become the exclusive home of all Paramount's movie releases as soon as the old contracts expire in 2024.
The strategy seems to be working. Paramount+ now generates close to half of streaming advertising revenue, equal to Pluto TV, suggesting that it is becoming a real advertising power in the streaming space where ad spending is projected to grow strongly. Subscriber count grew a whopping 6.8 million in the first quarter while Netflix (NFLX) declined. And this is before international really gets going; the service only launched in the UK and Ireland June 22 and is about to be bundled with joint venture Viacom18 in India, where it just won the highly coveted national cricket rights.
News
This is the one area where Fox outmuscles Paramount clearly. Paramount does run various local news outlets through its owned-and-operated affiliate stations and a relatively new streaming news network. Fox, however, is the king of cable news. Fox News once again led in total and primetime viewers among all cable networks. It is the highest-grossing cable news network and sometimes draws more viewers than MSNBC and CNN combined.
Fox News is so important that Fox management has even made an exception for it to its usual "pay-TV exclusive" rule. A partial one, anyway. The Fox News evening lineup shows - what some call the "opinion lineup" - are now available on Fox Nation the day after they air. The "hard news" daytime shows and live access to the channel remains pay-TV only, for now. But Fox seems to be taking at least some precaution against a sudden collapse of this revenue stream by having everything ready to move to streaming if that becomes necessary.
Paramount Global does not break out their operating revenues for news separately, but given their small scale they are highly unlikely to be material.
Content production
I define this category as producing owned entertainment content, not news content or just broadcasting someone else's games.
Fox
Fox is more or less out of this category, as getting out of it was the whole point of the Disney deal. Fox did purchase TMZ from WarnerMedia shortly before AT&T sold it to Discovery, so it's dipping its toes back into it, though some would categorize TMZ as news also. Some wouldn't. Fox also purchased MarVista Entertainment, to produce Tubi Originals movies on low budgets that can recoup their costs quickly, a la Hallmark or A&E. Big budget productions are strictly prohibited.
Paramount
Paramount is one of the most prolific creators of scripted content in the industry. Indeed, once you strip out sports contracts, its $15 billion in annual content spending can go toe-to-toe with most of the major players. Paramount has increasingly eschewed licensing to focus its content production on its own in-house streaming service. This means that its report that it is profitable in its studios becomes a little harder to measure because deriving imputed revenues changes when the subject is basically selling to itself.
Sports
This is probably the hardest one to pin down, and also where the two companies have adopted such wildly divergent strategies. Unlike in News or scripted, where one company got in and one got out, or free streaming where both are pursuing very similar strategies, sports is the one field where both companies seem to be more or less all in … and couldn't agree less with each other on how to go about it.
Paramount
Paramount's sports strategy has already been covered by me in (exhaustive) detail in multiple articles, so let me refer you to those and just briefly summarize here: Paramount is all in on streaming sports. Almost all of its major sporting contracts are either fully incorporated into Paramount+ or being phased out to other distributors over the next few years. But unlike too many US media companies, the deals are very reasonable. In fact, they are exceptionally profitable, even on an a la carte basis like streaming will probably create; and they are just about the only ones that are.
Fox
Fox's sports strategy is more interesting, potentially more lucrative … and considerably more risky. Fox has evinced a willingness to sign sports contracts that can only be profitable inside the traditional bundle. It's $2.3 billion NFL deal is the best example of this, but probably not the only one. Fox is essentially making the inverse bet of Paramount; that as other companies bolt from the bundle and put their sports content on streaming, pay-TV operators will become all the more desperate to retain someone else's sports, and hike their payments to Fox ever higher.
This bet is not wrong, exactly; as early as 2017, consumer surveys showed 14% of them only kept cable for live sports, and it was a substantial factor for many more. That has probably only gone up since then as more and more non-sports fans have cut the cord. Fox does indeed have tremendous leverage as long as it sticks to pay-TV, and with the company reporting last quarter 2/3 of its distribution is up for renewal in the next two years, it has a tremendous opportunity to translate leverage into profit.
But it does come with a corollary risk. Like its non-evening news lineup, Fox absolutely refuses to stream its sports. That would compromise its strategy. But without streaming, unlike Fox Nation and evening news, it has no ready backup plan if the departure of all the other sports collapses the bundle despite Fox's best efforts. Fox owes $2.3 billion a year on the NFL alone; that is more than its entire profit last year. Major League Baseball, one of Fox Sports 1's major properties, charges Fox $730 million per year. Fox Sports 1 has multiple other expensive sports deals, as well.
Summary
If Fox revenues do dive down with pay-TV subscriber levels - and Comcast (CMCSA) just announced that the largest US cable company is losing video customers at almost 10% per annum - there may not be time for the company to get a sports streaming service up and running before losses mount catastrophically. Unlike Tubi, such a service has to be capable of broadcasting live to 20 million at once, instead of a couple million on-demand throughout the day. It's a whole other level of performance that you cannot just order up in a week. In exchange for avoiding that risk, however, Paramount is essentially abandoning the bundle before it collapses, foregoing its share of the pay-TV monopoly's profits.
Diversification or Specialization?
Altogether, Paramount has a broad-based operation, producing scripted content and sports across a range of paid, free and traditional outlets, while Fox has narrowed in like a laser on news and sports through traditional channels.
Both of these approaches typically have merit, but there is one final point to be made: in terms of profits, not revenue, Fox takes "concentration" to a whole new level.
Fox Revenue Breakdown
Consistently, since the Disney deal, Fox has reported that its broadcast division, where Tubi also lives and which accounts for well over half of revenue, has accounted for less than 5% of operating income.
In part this is because the summer quarter is when the broadcast division has its lowest costs, owing to the idiosyncrasies of sequencing retransmission fees in the broadcast sector, so this should balance out a little; but not much. When the fiscal year ends June 30, past patterns indicate broadcast probably won't get over 10%. This with almost 60% of the revenue.
