Paramount Earnings: Why Cash, Not Just Content, Is King for Wall Street

Georg Szalai
·5 min read
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Content is king, late media mogul Sumner Redstone, founder of Paramount Global’s predecessor companies, used to say. But so is cash for many investors of the entertainment giant behind the likes of Paramount Pictures, CBS, MTV, BET, Showtime, Paramount+ and Pluto TV.

Paramount Global’s streaming business ended 2022 with a bang thanks to Tom Cruise’s Top Gun: Maverick, which helped Paramount+ add nearly 10 million subscribers in the final quarter of the year to get it to nearly 56 million and the conglomerate’s overall streaming sub count to more than 77 million.

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But what about the other bang … bang for its buck? As has been the case across the industry, the company’s fourth-quarter streaming loss widened to $575 million amid higher investments into content in a competitive atmosphere. With Wall Street increasingly impatient about Hollywood giants’ progress toward streaming profitability, management argued that 2023 will be its peak investment year in streaming and that its investments are paying off with hit content and subscriber and revenue gains.

But the financial challenge in focus is turning around recent losses, including in free cash flow, and returning to profits. Wall Street cares about free cash flow, because it helps investors gauge how much money a company has left over after paying all its financial obligations or, if it is negative, how much it has to tap into cash reserves or debt. Here, 2023 will see wider bottom-line losses for Paramount, which bled red ink in terms of free cash flow in 2022, before it hopes to turn the corner next year.

Indeed, after posting free cash flow of $481 million in 2021, the company swung to a free cash flow loss of $500 million in 2022. After another loss this year, which it says will see streaming losses peak, management vowed to return to positive free cash flow in 2024.

“The combination of streaming investment and the current state of the ad market will impact earnings and cash flow in 2023,” Paramount CEO Bob Bakish said on a Feb. 16 earnings call. “We see that narrowing significantly in 2024, resulting in meaningful total company earnings growth and a return to positive free cash flow.” Paramount is looking to cost savings to the tune of $700 million annually and revenue benefits from merging Showtime and Paramount+ and an improving advertising market to boost its bottom line.

But things will remain challenging over the near-term, multiple Wall Street analysts noted in their post-earnings takes.

The 2022 free cash flow figure “was below our/consensus estimates of +$150 million/$10 million, reflecting streaming investments and advertising headwinds,” highlighted Guggenheim analyst Michael Morris in a report, forecasting a 2023 free cash flow loss of $800 million this year. The expert maintained his “buy” rating on Paramount shares though and even raised his price target by $4 to $26.

CFRA Research’s Kenneth Leon also stuck to his stock rating, in his case a “hold,” and upped his price target, in his case by $2 to $23. “Paramount realized wider operating losses in its direct-to-consumer unit,” he also noted.

Wells Fargo analyst Steven Cahall is more pessimistic on Paramount’s stock, keeping his “underweight” rating and $11 price target. His report title included a pun about Paramount’s “mountain of entertainment” slogan and the Paramount Pictures logo: “A Mount of Leverage.” The analyst projects a $835 million free cash flow loss this year. And as for debt and stock, he estimates Paramount’s debt-to-earnings net leverage will peak at 5.8 times this year, warning: “The setup of linear risk, industry-wide direct-to-consumer challenges and high leverage means it takes only a small derating to erase much of the year-to-date equity gains.” And he added: “2024 feels a long way away.”

That is also why Macquarie’s Tim Nollen is keeping his “underperform” rating despite pushing up his stock price target by $3 to $18. “Paramount is slogging through a bad ad market while investing heavily in its direct-to-consumer (DTC) transition, and near-term numbers will remain subdued until a hoped-for ad recovery and easing in cost pressures emerge in the second half of 2023,” he emphasized. “We believe Paramount stock will thus continue to struggle versus peers and cannot justify … trading at a 33 percent premium to media peers.”

The team of analysts at MoffettNathanson, including Robert Fishman and Michael Nathanson, is also bearish and keeping a firm eye on cash trends. In a report entitled “Cash Is King,” they maintained their “underperform” rating and $15 stock price target on Paramount. “We continue to believe media investors should first focus on the true measure of operating performance – free cash flow – which ended the year at -$500 million!” they emphasized. “The main driver of negative free cash flow and pressure on total company earnings before interest, taxes, depreciation and amortization (EBITDA) has been the pivot to Paramount+. While subscriber growth has been better than expected, it has clearly come at a significant cost to the company’s overall financial picture.”

After streaming, or direct-to-consumers (DTC), losses in 2022 hit $1.8 billion, the MoffettNathanson team forecasts peak losses of $2.1 billion in 2023. “Although DTC losses should improve in 2024, the scale of the improvement is vague (we maintain our -$1.5 billion estimate),” it wrote. The savings from merging Showtime and Paramount+ will help here, but the analysts aren’t fully convinced yet, highlighting: “While the company expects $700 million in savings, the benefits of which will largely be realized in 2024 and beyond, we question how much is true cash savings versus future programming and other costs avoidance of limited bottom-line impact.”

Wolfe Research analyst Peter Supino even warned that with free cash flow dropping “on peak DTC investments,” the company also is at risk of having “a roughly $700 million dividend ripe for a cut if the ad market doesn’t meaningfully turn in the second half of 2023.” He kept his “underperform” rating on Paramount and a $12 stock price target, noting: “Management points to ’24, but hard to look past ’23.” In the title of his report, he summarized the key investor questions about Paramount and its streaming future with a studio pun: “Streaming Transformer or Mission Impossible?”

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