Shares of Paramount Global (NASDAQ:FOR) have increased in recent months due to rumors that the company could be sold or merged with one of its competitors. Even though nothing is clear about what will happen next, we One would assume that the worst for the company is probably behind it. While the rumors A While the deal could certainly continue to send shares higher, the expected improvement in Paramount’s own business going forward also makes the company an attractive investment at the current price.
More benefits to come?
Primordial reported decent third-quarter results last month, which could indicate that the worst for the company is finally behind it. After underperforming last year and earlier this year, the company’s third-quarter revenue beat estimates by $10 million and rose 3% year over year to $7.13 billion. dollars. HAS At the same time, improving bottom line results and expectations of strong cash flow next quarter should help the company maintain its momentum.
THE increase DTC revenue up 38% to $1.69 billion and Paramount+ subscriber growth from 2.7 million to 63 million in the third quarter indicate that the streaming business is finally gaining momentum. The company now believes that DTC’s losses are expected to be lower going forward, as OIBDA’s losses narrowed by over 30% in the third quarter and the streaming business is now on the path to profitability. To continue growing, the company plans to launch an ad-supported version of Paramount+ in different markets, releasing Paramount+ Essential on Amazon Channels in the United States and will expand its global presence by working with local partners to launch Pluto TV in different regions.
All of these growth catalysts could certainly help Paramount maintain its momentum and continue to exceed expectations in the fourth quarter and beyond. Additionally, the company is also improving its debt situation. Considering that at the end of the third quarter, Paramount had With just $1.8 billion in cash reserves and $15.6 billion in long-term debt, it made sense for the company to use the net proceeds from its sale of Simon & Schuster for $1.62 billion last month to repay part of his debt. Additionally, the billion-dollar takeover bid that was announcement last month should also help Paramount reduce its debt and lengthen its maturity profile, which could make its shares a more attractive investment.
Besides growing its core business and improving its debt profile, Paramount could also become a great M&A option for many investors. At the beginning of this month, it was reported than Apple (AAPL) wants to bundle its own streaming service with Paramount+, which could lead to an increase in subscribers to both services in the future. At the same time, there is news that Skydance Media is raising a war chest to acquire Paramount’s assets in the coming months. In addition to this, there is reports that Warner Bros. Discovery (WBD) is aiming for a merger with Paramount as the CEOs of both companies met last week to discuss a possible deal. Given that Paramount’s streaming business has finally gained momentum and is moving toward profitability, it’s possible that we’ll see a bidding war for the foreseeable future, given all of these reports.
To understand the magnitude of Paramount’s advantage given all of these developments, I decided to create a DCF model which can be seen below. Most of the model’s assumptions are either closely aligned with the street estimates or in line with historical performance. The WACC in the model is 9%, while the final growth rate is 3%.
The model shows that Paramount’s enterprise value is $26.9 billion, while its fair value is $20.14 per share, representing an increase of more than 30% from the current share price. walk. If any asset sale deal goes through, it’s likely the company will be valued at more than $20 per share. After all, Paramount itself was trading at over $20 per share earlier this year, so such a premium isn’t unreasonable given how well its business performed last quarter.
Major risks to consider
Although undervalued and benefiting from several growth catalysts, Paramount’s business could still underperform in subsequent quarters, which could cause its shares to depreciate. Earlier this year, some reports indicated that a quarter of American adults canceled their streaming subscriptions due to rising inflation. Although we have recently entered a disinflationary environment and are on track to experience a soft landing, it may still take some time to fully bring inflation under control.
Given the competitive landscape of cinema and streaming as well as the current macroeconomic environment, Paramount is always at risk of underperforming compared to others, particularly when it is most exposed to external factors relative to its much larger peers. It’s no surprise that Paramount has the the lowest ARPU of $6.11 per month among competitors due to its smaller size, which leaves little room for error. That’s why even 60 million dollars unused strike-related costs is a big problem for a company of its size.
It is also important to note that there is no guarantee that a deal will be completed and that certain assets will be sold in the foreseeable future. Earlier this year, Paramount was already present rejected a $3 billion-plus deal for its Showtime assets with its former executive and a similar situation could happen again. Any news of no deal is more than likely to negatively affect Paramount’s stock performance in the near term, as investors betting on the deal happening would unwind their positions and look for other merger opportunities and acquisitions.
While Paramount’s growth certainly comes with major risks, the company still has some good catalysts that could help its shares continue to appreciate in the near term. If any type of deal were announced, Paramount would be able to quickly realize shareholder value and create decent returns for its investors. In the absence of a deal, the company would still be able to create additional long-term shareholder value through the expected improvement in its business in the future.