Paramount Global (PARA, Financial) is a global media brand which owns CBS, Comedy Central, Channel 5, MTV, Showtime and more. It's not a stock I would ever have expected Warren Buffett (Trades, Portfolio) to be interested in, and yet, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) bought shares in the first quarter of 2022 according to the firm's latest 13F report.
During the quarter in question, Paramount's stock traded at an average price of $34 per share. Berkshire is now the largest shareholder in the company, as it owns 10% of shares outstanding with an approximate value of $1.9 billion at the time of writing (this is down from $2.6 billion at the quarter's average price, as shares have lost ground).
The company has been through various mergers and name changes over the years. In 2019, they were called ViacomCBS after the re-merger of the CBS and the Viacom. In February 2022, they announced they would be changing their name to “Paramount Global” to represent all that they do, and being “Paramount” in the media landscape.
Overall, more gurus have been buying Paramount stock than selling it in recent quarters, as shown in the below chart:
With Buffett's sudden interest in the stock, let's take a look at what might have led him to become a major shareholder of Paramount. Please note, I don't have any insider knowledge on Buffett's thought processes; this is just my own personal analysis of the company, and any musings as to Buffett's reasoning are purely speculation on my part. Moreover, it's possible that this stock was chosen by one of Buffett's portfolio managers rather than Buffett himself, since they have been taking on more responsibilities in recent years.
Leading business with a moat
Buffett has said many times in the past that he likes to invest into companies with a “moat,” or competitive advantage. In this case, my mind jumps to Paramount Pictures, which has the rights to leading iconic movies that could act as a strong moat. These include The Godfather, Top Gun, Forrest Gump, Iron Man, the Titanic, Star Trek, Mission Impossible, Transformers and more.
The company even has partial ownership of the rights to the Indiana Jones Franchise, along with Disney (DIS, Financial). These movie rights give the company the ability to do multiple future remakes and keep cashing in. For example, a new Top Gun movie has recently premiered in 2022. All four of the studio's theatrical releases this year have reached number one at the box office, which shows Paramount has no sign of slowing down.
Paramount media studios
On the television side, Paramount Global is a market leader. CBS is the number one broadcast network and has been for the past 14 years, while Comedy Central was rated the number one cable entertainment network and includes iconic shows such as South Park. Nickelodeon produces nine of the top 10 kids shows, which include "Paw Patrol."
Over the past few years, the company has spent a vast amount of time acquiring an extensive library of Spanish-speaking content, which is the fourth most spoken language in the world.
Growth in streaming
Paramount+ was launched in 2014 as CBS All Access. After the Viacom re-merger in 2019, their Media Networks brands such as Comedy Central, MTV, Nickelodeon and Paramount Pictures were integrated into CBS All Access. In 2021, the Paramount+ service was rolled out in 25 markets, including Latin America, Canada and Australia. In 2022, they plan to launch in the U.K. and South Korea, with further launches planned in Italy, France, Germany, Switzerland and Austria.
As of their latest first-quarter earnings report, Paramount+ acquired 6.8 million in new subscribers, which was above expectations. Currently they have just under 40 million paid subscribers, and they hope to reach 75 million by 2024. To put this into perspective, the market leader in streaming, Netflix (NFLX, Financial), has 221.6 million subscribers, while Disney+ has 137 million subscribers.
Although Paramount is late entering the “steaming wars” and is behind Disney, which made its move even more recently, the low-cost nature of streaming services makes the business model very profitable for companies with vast libraries of existing content. Moreover, many households subscribe to multiple streaming services. Paramount's differentiated and iconic content is appealing, and thus I believe subscriber growth will continue in line with their recent estimates.
The company also owns Pluto TV, which they acquired in 2019. This service added 3.1 million monthly active users (MAUs) in the quarter, bringing their total to over 68 million. They specialize in free, ad-supported streaming services, which gives Paramount a range of distribution methods appealing to different audiences. This service generated close to $1 billion in revenue in the most recent quarter, which is a 1,400% increase over the past three years.
Paramount also has a major opportunity to expand into India and offer their service to the growing middle class population there. CEO Bob Bakish stated during the first-quarter earnings call, "we're going to enter India in 2023, in a very capital-efficient, hard-bundled way." They are aiming for IPL (Cricket rights), which is very popular in India.
Stable financials
Paramount Global generated $28 billion in revenue in full-year 2021, up 12% compared to 2020. Gross profit came in at $10.8 billion, up 5% year over year, while operating income dipped slightly to $4 billion.
For the first quarter, total revenue was $7.32 billion, which represented a 1% decrease year over year due to a decline in advertising and licensing revenues. Adjusted operating income before depreciation and amortization declined 44% from the prior year’s quarter to $913 million, while selling, general and administrative expenses increased 13.9% year over year to $1.61 billion.
According to the earnings call, the Paramount+ segment saw strong revenue growth of 150% to $585 million, with domestic and international ARPU both higher quarter over quarter and year over year.
As a media business, the company operates with a healthy 35% gross margin and an approximately 14% operating margin.
The company ended the first quarter with $5.3 billion in cash and total debt of $16.8 billion. This is fairly high debt, but not surprising for a mature company.
In terms of valuation, the GF Value Line, which analyzes historic multiples, past financial performance and future earnings projections, indicates the stock is modestly undervalued.
The stock also trades at an enterprise value/Ebitda multiple of 5, which is at a similar level to Netflix's ratio of 4.68. Disney, meanwhile, is much more expensive with a multiple of 22.9.
Final thoughts
Paramount Global is a tremendous company with a strong competitive advantage thanks to its iconic movie selection. The company is also a leader in network TV across a variety of platforms and has strong growth plans for the future. The stock is undervalued relative to historic multiples and competitors, thus it’s no surprise Buffett loaded up on shares in the first quarter.
