$PARA A Deep Value Play?At the moment, Paramount Global (NASDAQ: PARA) is down more than 27% YTD as a result of the writers’ and actors’ strike as well as its long-term debt situation. Many investors are asserting that the stock is nothing short of a value trap given these indications. However, the writers’ strike appears to be coming to an end after writers and studios reached a preliminary labor agreement. As a result, PARA stock may witness a strong run in the coming days along with other movie theater and streaming stocks.
Aside from that, the company is currently de-leveraging its balance sheet by selling some of its non-core assets and is headed towards seasonal catalysts which include the Superbowl and the 2024 presidential election. Taking this information into account the company could end up counteracting its debt substantially, which is why the current dip could be an opportunity to enter a long position in PARA stock.
PARA Fundamentals
The Bear in the Room
The bear thesis for PARA is centered around its long-term debt which consists of $15 billion. While $15 billion may at first seem like an imposing figure, it is worth noting that its long-term debt is spread out through 2062 with its bulk due for payment in 2043. As is, the company only has to pay $3 billion in the next 5 years and $7 billion in the next 10 years. Meanwhile, it currently has $1.7 billion in liquidity which is more than enough to cover 3 years’ worth of debt.
Another reason why the company’s long-term debt is inconsequential is the fact that it is currently de-leveraging its balance sheet. Recently, PARA sold Simon & Schuster to KKR for $1.62 billion and is planning on using the net proceeds from the sale – $1.33 billion – towards paying off its debt. If push comes to shove, then the company could mirror The Walt Disney Company (DIS) by selling off its non-core assets, of which it has plenty. Possible iconic brands that could be utilized to provide substantial capital include Nickelodeon, MTV, Watch Magazine!, BET Media Group, and many others.
Writers’ Strike Coming to an End
After months of starts and stops, the Writers Guild of America (WGA) and the Alliance of Motion Picture and Television Producers (AMPTP) reached a tentative deal to end the ongoing writers’ strike. Currently, the WGA and AMPTP are drafting the final contract language, and once the contract is complete, the WGA’s negotiating committee will need to approve it, followed by the BoD for the union’s eastern and western branches. The votes are scheduled to take place on Tuesday, September 25th, and if the contract is approved, the WGA will make the contract language public.
The importance of this move is that it could help end the ongoing actors’ strike. The actors struck for many of the same reasons as the writers – asking for better pay and benefits, higher residual payments, transparency from streaming projects, as well as protections against being replaced by AI. That said, the deal with the WGA will act as a precedent for any deal with the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA).
While studios have not yet requested a meeting with SAG-AFTRA negotiators, this could be due to them focusing on their negotiations with the WGA. Now that the writers’ strike is a thing of the past, studios can focus their attention on the actors’ strike and begin negotiations with SAG-AFTRA.
If a deal with SAG-AFTRA is also successfully reached, Hollywood studios like PARA will be free to contract writers and actors for new projects as all such negotiations have been on pause during both strikes. This would be great news for the company as it could start working on new projects that may attract new users to its platform Paramount +.
While the end of the writers’ strike should boost PARA stock as well as other streaming and movie theater stocks, the company is set to benefit greatly from 2 major upcoming catalysts that always reflected well on its financial performance.
Seasonal Trends
Elections and the Super Bowl are classic staples of America. They are also extremely promising seasonal catalysts for many companies including PARA. According to the company’s financials, there is an extremely strong correlation between its ad revenue and these two events which is only natural since CBS airs Super Bowl ads as well as campaign ads. That said, this time around the company may significantly benefit from the Super Bowl and the 2024 elections due to Paramount + and increased election spending.
Super Bowl Impact
The Super Bowl is a significant driver of ad revenue for PARA. In 2021, 17% of the company’s advertising revenue came from the Super Bowl and the NCAA tournament. That said, in years in which CBS did not air the Super Bowl, the network took a hit in ad revenue as in 2017 its ad revenue decreased by 9% for that very reason and 2% in 2022.
This incoming Super Bowl is extremely beneficial for PARA since it will be aired on Paramount + for the first time. This means that the company will make ad revenue from CBS and Paramount + as well as likely witness an increase in its subscriptions. This move could be viewed as a marketing strategy to draw in new clients to the streaming service as the inclusion of the Super Bowl could also potentially serve as a seasonal stimulus for subscriptions. This is similar to Fubo (NASDAQ: FUBO) which experienced surges in its subscription revenue at the start of the NFL season as shown in the chart below.
It is however important to note that Paramount + is not Fubo. Fubo specializes in sports entertainment and its cheapest plan costs $75 a month. On the other hand, Paramount + has a diverse array of programs and its cheapest plan is worth $6 a month. Fubo is optimal for sports enthusiasts, while Paramount + would likely be favored by casual sports viewers with diverse interests. As is, 46% of Americans consider themselves casual sports fans while only 29% consider themselves avid fans.
Additionally, Fubo subscribers are likely to unsubscribe at the end of the NFL season given the streaming service’s price and a lack of sporting events of interest which can be seen in the chart above when its users decline in Q1 and Q2 compared to Q3 and Q4. On the other hand, Paramount + has a diverse portfolio that includes movies, reality TV, documentaries, and TV series which could attract newcomers from the Super Bowl. In short, unlike Fubo, Paramount + could retain a lot of its Super Bowl subscribers due to the diversity of its offerings.
Presidential Election Season
Every presidential election season since 2012 has been a record-breaker. In 2012, $2 billion worth of campaign ads were aired during the presidential election season which was at the time an extremely impressive record. During every presidential election season since then, a new record was established. In 2016 ad spending drastically increased to $6.5 billion and in 2020 that figure was $8.5 billion. On that note, according to a prominent media analyst specializing in ad analysis – AdAge – ad spending in the 2024 presidential election season is projected to reach $11 billion.
With this in mind, PARA has benefited significantly from elections, as in 2016, its revenues increased 12% in response to the increased spending on campaign ads. This phenomenon occurred multiple times including in 2018 when congressional elections caused the company’s advertising revenue to grow by 8%. Given the correlation between revenue growth and increased presidential campaigns’ ad spending, this upcoming presidential election season could provide the company with the boost it needs to rebound from current levels.
Valuation
Currently, PARA has a book value of $22.16 billion and a market cap of only $9 billion which means that the stock could be undervalued at the moment with a 146.2% upside from current levels. Additionally, its P/S ratio is 1.1 which is much lower than other companies with a similar business model like Disney and Warner Bros. Discovery, Inc. (WBD) which are trading at 6.6 and 2.7 sales multiples respectively. For that reason, the stock could be a bargain at the moment for value investors given that it is trading near 52-week lows.
Technical Analysis
On the hourly chart, PARA stock is trading near its 52-week low in a neutral trend as it is in a sideways channel between $12.56 and $13.86. Looking at the indicators, the stock is below the 200, 50, and 21 MAs which is a bearish sign. However, the RSI is oversold at 26 and the MACD is curling bearishly.
As for the fundamentals, the deal to end the writers’ strike is a major catalyst for all entertainment stocks since studios can contract writers to work on new projects which can see these stocks run over the coming days. That said, the company has bigger catalysts in the upcoming Superbowl which will be the first to air on Paramount + in addition to the Presidential elections whose ad spending is expected to reach $11 billion. Given that the stock appears to be undervalued from a fundamental standpoint based on multiple valuation metrics, PARA stock could be a smart buy for value investors at current levels.
PARA Forecast
At first glance, PARA may seem like a value trap given its market cap/book value discrepancy and its long-term debt, however, that may not be the case. Its long-term debt is divided so that it has more than enough liquidity to pay its debt due for the next 10 years. Furthermore, the company’s financials could soon be rejuvenated due to the 2024 presidential election season and the Superbowl that will be aired on Paramount + for the first time ever. With the stock trading near 52-week lows, PARA stock could be a bargain for value investors.
