At $13, Is Paramount Stock Deeply Undervalued?

Paramount Global stock (NASDAQ
NDAQ
: PARA) has had a tough year, declining by about 21% year-to-date, underperforming the S&P 500 which has risen by about 13% over the same period. The stock also remains down by over 36% in the last 12 months. The markets have been penalizing Paramount
PARA
for some time now, considering its mounting investments into streaming operations and the company’s decision to cut its quarterly dividend from $0.24 to $0.05 per share earlier this year. Moreover, the linear TV advertising market has faced headwinds as high inflation and softening consumer spending have caused marketers to pare back on ad spending, and this, too, has impacted Paramount. Although Paramount’s Q2 2023 results were a bit better than expected, revenue still declined by about 2% year-over-year to $7.62 billion, while adjusted earnings came in at $0.10 per share. The recent settlement between The Walt Disney
DIS
Company and Charter – which will involve Disney removing smaller, underperforming channels from cable bundles while adding streaming offerings – is also likely to have broader repercussions for the TV industry, and this could also be weighing on Paramount stock, given its exposure to the legacy TV space.

Interestingly, Paramount stock has a Sharpe Ratio of -0.3 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

That being said, we believe that Paramount stock looks oversold at current levels of about $13 per share. Paramount streaming investments appear to be paying off slowly. Over Q2, subscription revenue grew 47% to over $1.2 billion, led by subscriber growth on Paramount+. We think that Paramount’s earnings have considerable potential to increase in the coming years, given the long-term monetization prospects of the streaming business. For perspective, the company is projecting a 20% uptick in average revenue per user for Paramount+ in 2024. Paramount previously raised its 2024 direct-to-consumer revenue target from $6 billion to $9 billion. Moreover, Paramount can monetize its new content investments via a mix of television, theatricals, and streaming, helping it to boost its returns compared to players such as Netflix
NFLX
which are purely streaming-focused. Paramount stock trades at just about 11x projected 2024 earnings (which are being depressed by the current streaming spending) which is attractive, in our view. This is well below the likes of Netflix, which trades at over 26x 2024 earnings. We value Paramount stock at about $24 per share, which is well ahead of the current market price. See our analysis on Paramount Global Valuation: Expensive Or Cheap for more details on what’s driving our price estimate for Paramount.

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