On Jan. 30, Paramount Global became the latest Hollywood conglomerate to revamp its streaming setup and strategy, unveiling a sweeping combination of the Paramount+ streaming service and Showtime.
The move will also bring changes to programming — originals like Kidding, Super Pumped and American Rust, among others, were removed from the Showtime platform — and likely additional layoffs as Paramount CEO Bob Bakish acknowledged “uncertainty for the teams working on these brands and businesses.”
Wall Street analysts took stock of the plans, weighing in on Paramount’s streaming business in broader terms. Both the Showtime linear pay-TV channel and the premium tier of Paramount+ will be rebranded as Paramount+ With Showtime, with Chris McCarthy to lead the Showtime studio and linear channel, while Tom Ryan oversees the streaming business. Pricing and other details are expected to be disclosed later.
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Wells Fargo analyst Steven Cahall, who has an “underweight” rating and $11 stock price target on Paramount, in a Tuesday report attempted to estimate the cost savings. “We think Showtime is doing $2 billion in revenues on a roughly $1 billion content budget,” he wrote. “Assuming marketing, tech and general & administrative [expense] is another about 20 percent of sales, implies $400 million of costs and Showtime generating approximately $600 million in earnings before interest, taxes, depreciation and amortization.”
Concluded Cahall: “If Paramount cuts half of Showtime’s selling, general & administrative, that’s around $200 million, plus additional direct-to-consumer cost actions could drive total cost savings in the $300-$400 million range, or around 5-6 percent of Paramount’s ‘22 estimated selling, general & administrative [expense].”
Meanwhile, Morgan Stanley’s Benjamin Swinburne titled a Jan. 31 report on Paramount “The Cost of Streaming.” While he didn’t discuss the combination of Paramount+ and Showtime in it, he addressed the Hollywood conglomerate’s streaming business and stuck to his “underweight” rating and $14 stock price target, citing continued streaming losses. “Building a streaming business is capital intensive, even in success. Paramount+ has consistently outperformed expectations, but the cost to Paramount’s financial profile in terms of free cash flow generation and rising financial leverage are high,” he highlighted. “That profile and linear TV exposure keep us ‘underweight.'”
Swinburne positively noted, however, that “content strength has helped Paramount continue to grow its streaming business while others are slowing,” adding that Paramount+ “has outperformed expectations and is well on its way to a 60 million-plus subscriber business and $4 billion-plus in revenue this year.”
But he also highlighted the financial impact of the continued streaming push, concluding: “While Paramount has the cash balance to handle this lack of free cash flow generation, we see it as weighing on the equity as leverage rises, particularly at current valuation levels.”
Macquarie analyst Tim Nollen had already downgraded his rating on Paramount shares, while sticking to his $15 price target, on Monday before the Paramount+ and Showtime merger was unveiled. Across the industry, he noted “a mixed outlook for streaming — Disney and Warner Bros. Discovery should see direct-to-consumer operating losses ease in ’23, but Comcast and Paramount are still getting worse.”
Nollen also highlighted a media stocks rally early in 2023: ”Paramount has risen to valuation levels we can’t understand, at 11 times ’23 enterprise value/earnings before interest, taxes, depreciation and amortization versus peers excluding Disney at 5-7 times,” he wrote. “And this is ahead of a more difficult 2023 with ad revenue likely staying negative, NFL rights costs kicking in, and direct-to-consumer losses to deepen. We don’t get it, so we’ve downgraded Paramount from ’neutral’ to ‘underperform’.”
