Paramount Stock: On The Verge Of Peak Pessimism – Hang On Tight (NASDAQ:PARA)

I updated investors in Paramount Global (NASDAQ:PARA) that the time to catch the “massive drop” was finally here in July 2023. However, that thesis failed to pan out, as the recent dispute between Disney (DIS) and Charter (CHTR) led to more downside volatility.

Despite resolving the impasse between Disney and Charter, I assessed that damage had been done to Linear TV leaders like Paramount Global. Investors must understand that Paramount’s main competitive moat is supported by its well-diversified TV assets. It’s also the company’s primary revenue and profit driver, providing much-needed stability as Paramount demonstrates a path toward sustainability in its direct-to-consumer or DTC business.

The company reported its second-quarter or FQ2 earnings release in August, underscoring the robustness in its DTC segment. As such, Paramount maintained its confidence that it anticipates peak streaming losses in FY23 and a 20% uptick in ARPU in 2024. In addition, the company’s pricing strategy vis-a-vis peers suggests further upside potential as Paramount goes on the monetization offensive.

Despite that, I assessed that the recent downward de-rating in PARA indicates a pivotal development in its price action, suggesting buyers could have given up its crucial May lows (more on to that later). But why? What could have spooked buyers who defended PARA’s May bottom robustly to throw in the towel?

Warner Bros. Discovery’s (WBD) recent full-year guidance downgrade due to the ongoing strikes likely dampened investor optimism about Paramount’s execution in the second half. While Paramount anticipated the strikes to contribute positively to its free cash flow or FCF (with potentially less content production), these are likely transitory factors. The market is likely assessing whether it could further delay Paramount’s ability to sustain its DTC growth if the highly profitable and critical TV networks are stuttering.

Furthermore, the outcome of Disney’s agreement with Charter suggests that the transition to streaming has accelerated, behooving Paramount to speed up the path toward profitability for its DTC segment.

Accordingly, Disney has worked out options for its DTC business into Charter’s broadband bundles, which was previously not anticipated. Also, Charter’s ability to drop underperforming TV channels from the settlement suggests investors are likely concerned that the secular TV decline would hasten. With Paramount’s TV networks driving the lion’s share of its adjusted OBIDA in Q2, the risks are significant and cannot be understated.

Therefore, I believe the downward de-rating in PARA’s valuation is justified. Notwithstanding the recent selloff, PARA remains attractively priced. Seeking Alpha’s Quant rated PARA with an overall “B+” valuation grade. Despite that, astute investors understand that valuation should be considered as one of the many factors undergirding an investment thesis. Fundamentally, PARA’s competitive moat is based on its TV networks’ more predictable profitability while it further monetizes its less certain DTC transition.

However, the recent Disney-Charter settlement likely opened up a whole new can of worms, potentially disrupting Linear TV economics as Paramount and its cable partners work on an agreed path toward a sustainable future of streaming. In other words, Paramount’s economic moat could be at risk; therefore, a discounted valuation is arguably justified and not excessive.

As seen above, PARA buyers mounted a robust defense last week, likely attempting to buy into the recent capitulation move invalidating May lows.

However, this week’s price action suggests buyers have failed to follow through with further buying upside as investors likely reacted negatively to the Disney-Charter settlement.

As such, I assessed that my Buy rating is under threat and increasingly tenuous. Despite that, I evaluated that PARA remains close to peak pessimism, as seen in last week’s price action. In other words, the market has likely reflected significant pessimism on PARA’s execution risks, as seen in its attractive valuation and price action.

Therefore, a Buy rating on PARA remains appropriate, although buyers must hang tight for more volatility as they attempt to bottom.

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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