Paramount Earnings: Streaming Strength and Cost-Savings Plan Overshadow Revenue Weakness

Key Morningstar Metrics for Paramount Global

• Fair Value Estimate: $20.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Paramount Global’s Earnings

Paramount Global’s PARA direct-to-consumer segment, which includes the Paramount+ and Pluto streaming services, swung to a surprise profit in the second quarter, and DTC sales matched last quarter’s result despite lacking the boost of the Super Bowl. Management is also implementing a portion of the cost restructuring that Skydance identified when it struck its merger agreement with the company. Results in the rest of the business were unsurprisingly weak, but at Paramount’s current market value, it shouldn’t take much good news to generate enthusiasm. We’re maintaining our fair value estimate of $20 per share.

DTC revenue was up 13% year over year, with Paramount+ standing out. Paramount+ average revenue per user grew 26% year over year, even as the subscriber base was 15% larger. We’re unconcerned about the nearly 3 million net decline in subscribers during the quarter, because management attributed most of the loss to the termination of a partnership in South Korea that did not have much impact on financials. The firm also had some subscriber dropoffs related to those who joined for the Super Bowl. However, considering the firm had added 8 million subscribers over the prior two quarters, any decline in the United States is likely modest.

We expect DTC subscriber growth to pick up significantly in the near term, as Charter cable subscribers will receive access to Paramount+’s ad-supported service as part of their cable subscriptions in September. We expect to see more agreements like this. Although they may dampen ARPU growth in the near term and make the decline in linear television look worse (as subscription revenue will now be split between these two segments), we see a lot of opportunity coming from the bigger DTC subscriber base. Not least is the ability to maximize advertising revenue, which has averaged mid-to-high-teens growth in the segment for the past year and a half, even after excluding Super-Bowl-related advertising.