ViacomCBS wants to be known as Paramount Global now, unveiling its name change and all-in commitment to streaming during an investor day Tuesday afternoon. Fan-favorite content franchises and further reboots and revivals of nostalgic fare are part of its game plan to go big in streaming, which Wall Street analysts started reviewing on Wednesday.
Key topics of their commentaries and reports were an increased streaming subscriber outlook and higher spending plans by management, led by CEO Bob Bakish, and what it all means for investors. Those reacted to the company’s presentation, which took place after Tuesday’s stock market close, by selling off its shares early on Wednesday. They were down 17.6 percent $29.66, near their 52-week low of $28.29, in early trading.
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Bank of America Merrill Lynch analyst Jessica Reif Ehrlich downgraded her rating on the stock of Paramount/ViacomCBS from “buy” to “neutral” and cut her price target by $13 to $39, saying she was “heading to the sidelines” on the stock as increased streaming content spending will impact the bottom line for the foreseeable future. “Not Mission: Impossible, but a tough road ahead,” she argued.
“We commend management for taking a bold approach, but near-term headwinds will drive year-over-year declines in calendar year 2022 and 2023 operating income before depreciation and amortization,” Reif Ehrlich wrote.
Meanwhile, Wells Fargo analyst Steven Cahall in the title of his report compared the investor day to a “Rorschach Test.” “Each investor may see something different when they look at ViacomCBS, soon to be Paramount,” he wrote overnight and maintained his “overweight” rating and $60 stock price target. “Bulls see the direct-to-consumer execution and upgraded long-term targets. Bears see another estimate cut and not enough assets to climb to cruising altitude. We give credit to management for exceeding expectations, think subs will be very strong in ’22 and believe content creation always has value in a gold rush.”
How should investors play the stock? “We’d buy a dip to hold into 2023 when line-of-site on the earnings inflection arrives,” Cahall suggested. He also highlighted that it was “non-controversial to say that [the company’s stock] is under/lowly valued. The question is what gets its valuation to rerate? The answer is proving that it can: 1) hit the direct-to-consumer targets; 2) grow earnings by 2024; and 3) achieve some long-term stable margins. Nods to industry consolidation could factor in, but it’s mostly an execution story, which has been strong and overlooked amidst the recent focus on earnings.”
Meanwhile, Guggenheim analyst Michael Morris wrote in his report: “Management delivered a detailed content presentation that included a rebranding announcement and much anticipated lifted streaming subscriber guidance” to more than 100 million by 2024 from 65-75 million previously. That will mean higher expenses to feed the growth with more content though. “Subscriber pursuit will come at a higher net investment in 2022 and 2023, with our revised adjusted operating income before depreciation and amortization forecast of $3.74 billion and $3.28 billion, below our prior $4.63 billion and $4.66 billion,” Morris explained. “We are optimistic about Paramount’s long-term growth potential, with the 2024 streaming revenue forecast of $9 billion showing leverage over the guided $6 billion of content investment.”
The Guggenheim analyst projects “a smaller total streaming loss in 2024 compared to 2023,” with the company “nearing profitability in 2025.” Overall, Morris maintained his “buy” rating on the entertainment conglomerate, but cut his price target by $13 to $40, reflecting “the greater near-term investment than previously forecast.”
Daniel Salmon, analyst at BMO Capital Markets, had similarly mixed feelings. “Streaming Is More Paramount, but Catalyst Path Remains Unclear,” argued the title of his report, which lauded “a greater commitment” to streaming. His takeaway: “We think this strategic clarity will ultimately help build long-term value, but we look to gain more conviction in potential upside to near-term expectations and clarity on catalysts over the next 12 months, as investment remains the primary theme.” Salmon has a “market perform” rating and $38 price target on the stock.
Meanwhile, Cowen’s Doug Creutz, who has a “market perform” rating on the stock with a $38 price target, was bullish on the company’s name change, but highlighted “continued direct-to-consumer losses into at least 2024” and “no definite timeline” for streaming profitability. “New name, same questions,” he concluded in the title of his report.
“Paramount has set itself a course to compete toe-to-toe with larger and better financed companies with (in at least some cases) more powerful IP portfolios,” he summarized the key challenge. “We think the margin for error in this endeavor is very slim, given that the end goal is not just significant revenue growth, but sustainable profitability.”
But Creutz did give management high marks for the new name. “We do like the new name,” he noted. “We lobbied for a Paramount-focused name two years ago when the Viacom-CBS merger was announced, and think the new moniker is a significant improvement.” And he emphasized that “we also appreciate the expanded disclosures, which break out the full profit and loss for the direct-to-consumer businesses, as well as specific audience and revenue metrics for Paramount+ and Pluto TV.”
