Warren Buffett has developed a reputation for finding bargains throughout his career. Stocks such as Apple and Coca-Cola have brought him massive returns over the years.
Though Buffett is no longer the sole decision maker at Berkshire Hathaway, Buffett's company continues to find new investments at bargain basement prices, and one of his latest is Paramount Global (PARA 2.91%).
The Paramount Global investment
Investors should first understand that Paramount Global is a recent investment for Berkshire. Sometime in the first quarter of last year, the investment company purchased almost 69 million shares of the media stock. By the end of the third quarter, that position would grow to more than 91 million shares worth over $1.9 billion.
Admittedly, the stock has fallen during this time, meaning this is yet to be a profitable investment for Berkshire. The valuation may be keeping Buffett's team from giving up so soon. At a P/E ratio of about 4.5, its multiple is a small fraction of competitors such as Netflix and Comcast, which sell for more than 30 times their earnings.
How it holds up financially
Amid that low earnings multiple, Paramount Global faces significant struggles, particularly with its financials. Revenue of just under $22 billion in the first nine months of 2022 grew 6% compared with the same period last year. That increase did not stop the net income of $1.1 billion from dropping by 56% over that time. Costs and expenses surged by 16%, contributing heavily to the lower net income.
Additionally, much of the pain comes from its TV media segment, whose revenue fell 4% in the first three quarters of 2022. This is significant since it accounted for 72% of revenue during the period.
That falling revenue continues a long-term trend of declining TV viewership that has weighed on this division and, by extension, the stock. Paramount Global lost almost 65% of its value over the last five years.
Nonetheless, the remaining 28% of the company points to some bright spots. Filmed entertainment benefited from moviegoers returning to theaters after the lockdown and the success of Top Gun: Maverick. Its revenue rose 39% during the aforementioned time frame amid reopenings.
Also, the direct-to-consumer segment primarily involves its Paramount+ streaming service. The Yellowstone franchise, the numerous iterations of the Star Trek series, and the Indiana Jones movies are among other assets.
Subscriber numbers have grown exponentially over the last few years. At the end of 2018, the company, then known as ViacomCBS, claimed just 7.2 million subscribers. By the third quarter of 2022, global subscriber numbers had climbed to almost 67 million, 42% more than last year. A rebranding to Paramount Global in early 2022 could have also helped. Paramount+, which accounts for 46 million of the global subscriber base, was No. 1 in subscriber growth.
Those improvements boosted revenue for the direct-to-consumer segment by 56% year over year in the first nine months of 2022, making it Paramount's fastest-growing segment. As it becomes a more significant revenue driver, direct-to-consumer could inspire a revival in Paramount Global stock.
Making sense of Paramount Global
The move by Warren Buffett's team to add Paramount Global stock could make shareholders much richer. Admittedly, the decline in traditional TV media and a return to pre-lockdown watching patterns are factors that have investors asking, can Paramount recover?
However, that low multiple could set Paramount Global up for a significant comeback. Even with the pain from the TV media segment, Paramount benefits from owning numerous valued media franchises, and the service has seen massive subscriber growth as the stock declined. Once those tailwinds adequately compensate for the slide in the TV media segment, Paramount stock could begin to deliver outsized returns.
