Was it the Bumblebee bit?
Paramount Global stock has plunged more than 20% since the company’s investor presentation Tuesday, including a 3% dip today. The vanishing of almost $5 billion in market value, after the company formerly known as ViacomCBS declared it was going all-in on streaming, has left even die-hard backers searching for explanations.
The virtual presentation itself was businesslike, running about 2 hours and 20 minutes, notably shorter than the three-hour one mounted by the company last year. But in a deviation from the recently established template for streaming pitches to Wall Street, Paramount’s kicked off with some shtick. As they had in 2021, board chair and controlling shareholder Shari Redstone and CEO Bob Bakish appeared together in a short sketch, trading synergistic quips while driving in Bumblebee, the yellow car from Transformers.
“I feel the need — the need for speed!” Bakish crowed from the driver’s seat, quoting Top Gun. “You go, Maverick!” Redstone replied. As they screeched to a halt, she added, “Thanks for the ride. Now let’s get to work!”
Taking the virtual stage, Bakish struck an upbeat tone. “When we spoke to you last year, some of you felt we were on an impossible mission,” he said. “But today, as you can see, it’s not only possible, it’s happening.” Repeatedly throughout the event, Bakish, Redstone and a number of other executives emphasized how fully the company was committed to streaming.
Wall Street, however, is reconsidering whether streaming is good business. A conga line of executives rolling out sizzle reels of new premium programming won’t make the splash it once did for Disney and, to a lesser extent, WarnerMedia and NBCUniversal. Not during a collective panic attack over whether company balance sheets can survive the high cost of content spending. A number of analysts issued downbeat takes on Paramount, including Bank of America’s Jessica Reif Ehrlich, who downgraded her rating on the company’s shares to “neutral” from “buy,” helping to trigger an 18% plunge by the stock the day after the event. While she acknowledged the sizable upsizing of the company’s subscriber forecast (to 100 million by 2024), she said the legacy part of Paramount remains “under continuing pressure.”
Streaming Gets A Rethink
The rethink started last year and accelerated in January after Netflix reported disappointing fourth-quarter subscriber growth and issued a weak forecast. Its stock took a huge hit, falling 20% in a single day, and it hasn’t recovered. “If Netflix can’t be successful and scale and get leverage from all of their content spend, then nobody can,” one analyst observed.
The Paramount event contrasted with Disney’s successful efforts to rally investor enthusiasm in 2019 and 2020. When Disney first laid out its plans for Disney+, drawing gasps when its initial $7 monthly pricing was revealed, the company’s stock rose 10% the next day. In December 2020, when the company announced a flood of new film and TV titles in a four-hour extravaganza, the gains were even larger, with the stock jumping almost 14%.
After the first Disney day, one analyst recalled, “everybody re-did their models and as they started seeing some success with subscribers and some successful shows, the idea was they had to be all-in – pull all theatrical and put the money on Disney+. That’s started to change.”
One fund manager felt the Bakish-Redstone intro was “kind of cringey” and the numbers laid out by the management team left questions even for those impressed by the company’s content pipeline and the growth of Paramount+. The streaming service ended 2021 with 32.8 million subscribers, accounting for most of the company’s 56 million subscribers. But content spending, which will hit $6 billion in 2024, is eroding cash flow and earnings. Even though the pay-TV bundle is shrinking, the dual revenue stream perfected by the cable business is hard for any legacy media player to quit.
And, even at $6 billion, Paramount’s spend will be a fraction of the outlay by Netflix and rivals like Disney and WarnerMedia (even before the latter’s pending merger with Discovery). “I am not sure how they think they can spend as little as they are spending,” one analyst said. “They have to spend more to compete. But I don’t know that they can afford to spend more – or even that they can afford to spend what they are spending.”
“Maybe Let’s Look Out Further”
What would have helped investor day? Perhaps providing forecasts beyond 2024, to the point when the company expects Paramount+ to hit break-even. (CFO Naveen Chopra predicted losses would peak in 2023.) “Some timeframe would have been nice,” said one Wall Streeter. With 2024 just two years away, agreed another, “Maybe let’s look out further, to 2027 … Let’s go out five years. What does the combined business look like, total EBITDA, total free cash flow, what does the balance sheet look like?”
He took issue with what he called an “amorphous comment” by Chopra that over the long term, the streamer could have the same type of margins as the TV/media business. “I have a tough time believing that on faith and the market does as well.” Ehrlich, in her downgrade note, said she didn’t expect those margins to materialize until “the back half” of this decade.
Also, some investors have gotten the impression that the company has been selling off assets like CNET, Black Rock, CBS Studio City and Simon & Schuster to fund its business shift. Free cash flow, a key metric, was only $481 million last year, a decline from almost $1.9 billion in 2020 due to stepped-up investments in programming.
The overall shift to streaming is “permanently depressing the profitability of the industry,” warned one media agency vet.
Not only could paying subscribers be hard to attract and keep, but advertising revenue in streaming is showing signs of flattening. Free platform Pluto TV, which Viacom acquired in 2019, has grown into more than a billion-dollar business, but ad revenue outside of Pluto increased just 9% in the fourth quarter to reach $322 million.
The overall shift to streaming is ‘permanently depressing the profitability of the industry,’ warned one media agency vet.
The oft-used reference to the “streaming wars” sort of implies a single winner. Even if more than one new arrival makes a viable go of it, an upper echelon is starting to form. Netflix remains the leader with 222 million global subscribers, and Disney+ has earned a spot in the top tier with almost 130 million after just two-plus years in existence. HBO Max ended 2021 with almost 74 million subscribers when combined with linear HBO and considers itself among the top three. Obviously, cash-rich tech firms Amazon and Apple aren’t going anywhere and can put the squeeze on media companies by spending freely and pursuing a different strategy.
Optimists about Paramount+ see its deep content well giving it a fighting chance to compete. Execs chalk up the stock movement to market volatility and point to the streaming shift as a long-term strategy, one that is impossible to measure in daily increments. Internally, according to a person familiar with management’s thinking, the view from the top is that the investor presentation was a success.
Still, many longtime industry observers note that Sony is happy and prosperous as an “arms dealer” without its own streamer. That was a description Bakish also embraced while he was running Viacom before its reunion with CBS. While the decision to license Yellowstone and library cornerstones like South Park and the Godfather films to rival streamers hasn’t been an especially good look, it generated lots of cash. The company has been working in recent months to change course and claw back more rights.
“They’re doing the right thing to spend heavily on content and put all their resources on building the DTC business,” one analyst said. “Because that is going to work, and they will have a business that in three to four years supports overall growth at the company in a stable way. Or it won’t work, and they will get bought.”
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