Paramount Global (PARA +0.00%) (PARA.A +0.00%), once an afterthought in the streaming market, received attention lately when it attracted investment from Warren Buffett's Berkshire Hathaway. Its streaming platform, Paramount+, uses a content library that could make it competitive.
Nonetheless, it falls well short of Netflix's (NFLX 0.50%) subscriber base. Even though Netflix has struggled recently with user base growth, Paramount might face significant challenges in taking its crown.
Image source: Getty Images.
Understanding Paramount Global
First, Paramount is hardly a new company. It formed out of a rebranding of ViacomCBS, and Viacom had owned Paramount and its content library since 1989. However, wanting to leverage what it calls an "iconic global name," ViacomCBS rebranded itself as Paramount Global in February 2022.
Its library includes content such as the Star Trek movies and TV series, The Godfather trilogy, Indiana Jones films, and Yellowstone. Rebranding a company that owns such franchises has changed the game for Paramount. In the first quarter of 2020, Paramount+ claimed about 13.5 million subscribers. Two years later, it now boasts 62 million subscribers.
Moreover, it has pivoted to attract both budget and premium customers. Its ad-supported service costs $4.99 per month. This adds live events such as the NFL on CBS, top soccer matches, and other live sports. It also offers a premium, ad-free service for $9.99 per month that includes all sports offerings of the lower-cost plan plus one's local CBS station.
Despite this growth, revenue fell 1% year over year in the first quarter of 2022 to $7.3 billion. Direct-to-consumer, which operates the streaming platform, experienced a revenue surge of 82%. Nevertheless, it makes up only about 15% of the company's revenue. In contrast, the TV media and filmed entertainment segments experienced significant revenue declines. Since expenses rose 12%, net earnings of $433 million also dropped by 52% year over year.
| Segment |
Q1 Revenue | % of Company Revenue | Y-o-Y Change (%) |
|---|---|---|---|
| Direct-to-consumer | $1,089 | 14.9% | 82% |
| TV media | $5,645 | 77% | (6%) |
| Filmed entertainment | $624 | 8.5% | (27%) |
| Eliminations | ($30) | <0.1% | 23% |
| Total | $7,328 | 100% | (1%) |
Data source: Paramount Global Q1 2022 Earnings Report
Analysts also forecast a 25% drop in net earnings amid 7% revenue growth for 2022. This may explain why the stock rose by only 2% over the last year. But the drop in profits still leaves it with a five price-to-earnings (P/E) ratio (and a 12 forward P/E ratio), meaning investors like Warren Buffett and others may stay with it amid the streaming growth.
NASDAQ: PARA
Key Data Points
How Netflix compares
Having said that, before jumping on the bandwagon with Paramount, one might want to look at its performance relative to that of Netflix. Netflix has a much different history from Paramount. It pioneered the streaming industry once the technology allowed it to move on from its initial DVD-by-mail business. It attracted customers with low prices and movies available on demand. Over time, these services prompted customers to abandon video stores and, later, cable TV services.
However, it initially built its platform on content from other companies. It only began to develop content to compete as other services emerged. This strategy proved successful as many of its programs won awards, and Netflix prospered as it steadily expanded its services across the globe. As of the end of Q1, Netflix boasts about 222 million subscribers.
Nonetheless, other competitors such as Disney, Amazon, and Warner Bros. Discovery added content and owned content libraries built up over decades. These offerings seem to have made consumers less willing to pay Netflix $15.49 per month for its service when most other plans charge less. Due to this challenge, Netflix plans to offer a lower-cost, ad-supported service.
But even with its troubles, Q1 revenue came in at $7.9 billion, a 10% increase year over year. That helped soften the blow from a massive surge in operating expenses and higher income taxes. In the end, net income over that period fell by 6% to $1.6 billion. Furthermore, forecasts of dropping subscriptions sent the stock plummeting despite a forecast for 10% more revenue in the second quarter compared with the same quarter last year.
Still, those predictions helped take its stock into value stock territory. Netflix now supports a P/E ratio of just 17, an indication that the stock may have oversold.
NASDAQ: NFLX
Key Data Points
Is Paramount the next Netflix?
The level of competition in the video streaming market makes it unlikely that Paramount will become the next Netflix. Even with its lack of growth in recent months, Netflix still holds 222 million subscribers, approximately four times the Paramount+ customer base. Additionally, while subscriber growth is impressive, Paramount remains burdened by its legacy TV media business. Such factors make Paramount fundamentally different and may hamper its potential as a communications stock, at least compared to the streaming behemoth.
