Paramount Global

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Paramount Global is a global media, streaming, and entertainment company that creates premium content and experiences for audiences worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Paramount Global operates through three main segments:

  • TV Media: Comprises the CBS Television Network, domestic television stations, cable networks (including Showtime, MTV, Comedy Central, Paramount Network), and international channels and studios. This segment generates revenue mainly from advertising, affiliate fees, and content licensing.
  • Direct-to-Consumer: This includes premium subscription streaming services like Paramount+, Pluto TV, and Showtime, which generate revenue from subscription fees and advertising.
  • Filmed Entertainment: This includes Paramount Pictures, Paramount Animation, and Nickelodeon Studios, which generate revenue from theatrical releases, home entertainment (e.g. DVD sales), and licensing.

Industry Landscape and Competitive Dynamics

The media and entertainment industry is highly competitive.

  • Streaming Wars: The rise of streaming has intensified competition, with major players like Netflix, Disney+, Apple TV+, and Amazon Prime Video all vying for consumer attention and subscription dollars. This has resulted in increased programming costs and a more fragmented audience base.
  • Cord Cutting: Traditional cable television viewership is declining, forcing companies to adapt to shifting consumer preferences and invest heavily in streaming services. This transition has been rapid, with many traditional companies still figuring out how to adapt to the new environment.
  • Advertising Revenue Fluctuations: Advertising revenue is cyclical and is tied to overall economic health. Thus, macroeconomic events like inflation, economic slowdowns, or recession can impact advertising revenue significantly. In this way, a company like PARA is vulnerable to changes in the broader macro-economic environment.
  • Content is King: The business is heavily reliant on its ability to create hit shows and films to attract consumers and drive revenue. Content creation is inherently risky, so, success is not a given. Many times companies will be faced with disappointing performance of their own original content.
  • Fragmented landscape: The market is full of players of varying sizes making it hard for one competitor to establish a huge advantage over the others.
  • Financials and Growth: The sector has seen a growth in revenues over the past decade, but the financial performance is largely uneven. There is a lack of significant positive net income in the sector, on average.

Moat Analysis

Based on the nature of the business, it would be correct to say that there is an inherently low moat for the company, and that is reflected in the low moat score of 2 out of 5.

  • Brand Recognition: Paramount has valuable brands and franchises such as CBS, Paramount, and Showtime. However, in a highly saturated and competitive market, these brands do not give the same kind of power as companies such as Disney have. There are very limited moats provided by strong brands, thus, this provides no substantial economic moat.
  • Switching Costs: Switching costs are low for consumers. It is very easy to switch from one streaming service to another, cancel a cable subscription, or watch movies in another platform. This creates little to no cost for the customers, and consequently, weak moats in these divisions.
  • Network Effects: There are only a few network effects seen in the business, and these can be easily circumvented. For instance, people have a lot of streaming choices on what to use for TV shows and movies. They are usually not forced to use only one streaming service. Hence, this also provides little to no moat.
  • Cost Advantages: The company’s primary competitive strategy isn’t built on low costs, given its investment in producing quality content, as well as sports and news broadcasting, but that doesn’t give a sustainable competitive advantage either.
    • Companies with cost advantages can often create wide moats and have consistently high returns on capital (ROIC).
    • Thus, lack of a sustainable cost advantage, also means that there’s no meaningful economic moat on that side of the business.

Moat Rating: 2/5

Paramount Global has some identifiable brands in some of its segments, and can achieve strong positions in certain areas. However, it faces great competition across all of its business segments with other larger, well capitalized companies. Thus, a narrow moat rating is the best that the company can achieve, as there are simply not enough sources of long-term profitability.

Risks to the Moat and Business Resilience

  • Streaming Competition: The company faces stiff competition in streaming. Increased investment in original content, and the promotion of streaming services to consumers, and high churn rates amongst users, are some of the serious risks that could affect the company’s moat and the business profitability.
  • Cord Cutting: The continued decline of cable television usage is a fundamental problem for the company, and this trend is very hard to reverse. It means that the revenue source the company has relied on for ages is slowly being eroded.
  • Reliance on Hit Content: A significant portion of the company’s success is dependent on producing hit shows and movies, and those are notoriously hard to predict. Failure to do so can seriously affect the company’s business resilience.
  • Debt Load: The company’s debt load, while seemingly manageable currently, does impose a limitation on their ability to invest, particularly in comparison to companies with stronger finances.

Financials In-Depth

  • Revenue Diversification: Paramount generates revenue from TV Media (advertising, affiliate fees, content licensing), Direct-to-Consumer (subscriptions, advertising), and Filmed Entertainment (theatrical, home entertainment, licensing). In general, TV Media and Filmed Entertainment are their main revenue sources.
  • Revenue Growth: Paramount has seen a growth of 4.3% in revenue from 2021 to 2022, as the company has shown that the demand for streaming is growing rapidly, but they still rely on traditional broadcasting for the bulk of the revenues. In the latest quarter revenues decreased by 5% year-over-year, reflecting the volatility the company is facing.
  • Earnings Volatility: In the last 9 months of 2023, the company’s diluted EPS from continuing operations was -$3.09, representing a significant downturn in profit generation compared to last year. In the latest quarter, their diluted EPS from continuing operations decreased by 46%, indicating severe headwinds that the company is facing currently.
  • Margins: Profit margins have been volatile, as the company has had difficulty in managing costs and expenses. Thus, they may struggle to maintain profitability in the coming years.
    • Operating margins have been trending downward.
  • Free Cash Flow: While Paramount can generate positive operating cash flow, the free cash flow is sometimes weak due to large capital expenditures for their various operations. They need a substantial cash flow to be able to pursue growth in their segments, as well as to weather a possible recession and an industry slowdown.

  • Debt: The company has $16 billion of debt, and they have been pursuing deleveraging, but the debt level still remains high.

  • Balance Sheet Analysis * Current Ratio is 1.04, which shows that the company can barely meet its short term obligations, thus, they have limited liquidity. * Debt-to-equity ratio is around 1.02 showing that the company has a decent amount of leverage. The company does not operate in an asset light model, and it’s also apparent that their debt is more than their equity.

Management’s Commentary

  • Management has been actively discussing strategies to enhance the company’s streaming business and improve content quality to attract new users.
  • The management acknowledges the need to invest heavily in the business, but is also attempting to be more efficient in cutting costs.
  • They have also acknowledged that competition is intensifying, and also have announced that their main goal is to generate more cash flows and profitability in the long run.
  • Management has acknowledged the financial headwinds, and have expressed they are pursuing a strategy that leads to increased growth in profits.
  • Share Repurchases In a recent SEC filling, the company has authorized a program to repurchase 1.5 billion in common stock. They have done this previously in recent years as well. The timing of share repurchases is usually related to the price of the company. As such, buybacks at these levels indicates that the management believes that the stock is cheap and undervalued.

Understandability Rating: 3/5

The business of Paramount Global is relatively understandable as they are in the content creation, broadcasting, and streaming business. However, the complexities of all their different segments, and the volatile competitive landscape does make it a bit harder to fully understand the company. Thus, a rating of 3/5 is warranted for understandability.

Balance Sheet Health: 3/5

The balance sheet is not awful, but is also not particularly strong. The company is highly leveraged, they have a barely positive current ratio, and thus, the balance sheet is not strong enough to give a 5/5 rating for health. A rating of 3/5 is most appropriate for the company.