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While Paramount Global stock (formerly ViacomCBS) had a roller coaster ride of sorts through 2021, with the stock more than doubling and then losing over half its value in a short span of time, driven by a major share offering and the $10 billion collapse of Archegos Capital Management fund, things appear to be settling down in 2022. Year-to-date, Paramount stock remains up by about 20%, compared to the broader S&P 500 which remains down by around 7%. So what’s driving Paramount stock higher, and is it a buy?
Paramount has between witnessing a nice recovery in revenue growth recently. Over Q4 2021 Paramount Revenue grew by 16% year-over-year and full-year 2021 growth stood at almost 13%, marking a solid improvement from the low single-digit to negative revenue growth seen in the last three years. Paramount has been looking to divest its non-core assets while seeking to become a more focused organization centered around streaming. Over Q4, Paramount’s total streaming revenues grew by around 48% year-over-year to over $1.3 billion, while subscription-only streaming revenue, excluding ads, rose by a solid 84%. Over Q4 alone the company added about 9.4 million global streaming subscribers, with its total subscriber base standing at over 56 million, led by growth in the Paramount+ business. Paramount is also faring very well in the advertising-supported streaming space, largely driven by Pluto TV, which grew monthly active users to over 64 million. Paramount now expects to have 100 million streaming subscribers by the end of 2024, up from its previous target of between 65 million to 75 million, while the ad-supported Pluto TV platform is expected to have between 100 million to 120 million MAUs in the same period. For perspective, Netflix NFLX has over 220 million streaming subscribers.
However, solid streaming growth is coming at a cost. Paramount has scaled up its spending on content and marketing for its streaming services, hurting its profits. For instance, adjusted operating income, excluding operating profits declined over 50% year-over-year to $557 million in Q4. Moreover, consensus estimates for EPS also point to a year-over-year decline in earnings for 2022. The higher spending could weigh on the stock in the near-to-medium term, as the markets are likely prioritizing cash flows and profitability over growth, given the rising interest rate environment. For perspective, Paramount stock trades at just about 15x projected earnings, which is low considering the strong growth rates the company has been posting. That being said, we believe that Paramount remains undervalued at current levels, given the long-term monetization prospects of its streaming business, and the recovery of the advertising market following Covid-19. Paramount’s rich library of content and brands including the Showtime Network, Nickelodeon, and MTV could make the company an acquisition target, for larger streaming platforms and technology companies looking to enter the media space. We value Paramount stock at about $48 per share, about 33% ahead of the current market price. See our analysis on Paramount Global Valuation: Expensive Or Cheap for more details on Paramount’s valuation.
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