Paramount Global (PARA -4.54%) is the newest iteration of the Paramount media empire, which owns film studios, traditional networks, cable channels, and streaming sites. It's a huge business with many parts that's trying to make its name in streaming.
It caught investing legend Warren Buffett's eye last year, and he loaded up on the stock, probably due to a high-yielding dividend and low valuation. But that's not usually enough for Buffett, who essentially looks to invest in great businesses on top of anything else.
But after a first-quarter report that disappointed investors and included a huge cut in the dividend, it's looking less like a value. Could Buffett have made a mistake here? He claims to make mistakes all the time, which is why investors should always carefully research any stocks before buying and never just jump on the Buffett bandwagon, or mindlessly follow any other successful investor. Let's take a deeper look and see if Paramount is a buy right now.
What's going right
The first quarter wasn't awful all around. There were some very strong indicators, especially in the streaming business. Streaming revenue increased 39% over last year, as Paramount+ saw a 65% increase in sales. Paramount+ and Pluto, the company's free ad-supported streaming television (FAST) service, both added accounts, and viewing hours increased 50% over last year and 20% from last quarter. That's significant progress and bodes well for the viability of these services.
It also has valuable assets in its popular cable channels, including MTV, Showtime, and Nickelodeon, and its Paramount film studios that release movie hits like last summer's top-grossing Top Gun: Maverick.
What's going wrong
Streaming is growing, but like many of its counterparts at other companies, it's coming at a high cost. Adjusted operating income before depreciation and amortization (OIBDA), what it uses in place of the more standard earnings before interest, taxes, depreciation, and amortization (EBITDA), fell by $55 million from last year to a $511 million loss. Revenue and OIBDA both declined from last year in the TV media and filmed entertainment divisions as well.
With all the segments' profitability declining, net loss came in at over $1 billion. Adjusted OIBDA, which takes out charges related to restructuring, was $548 million, although that was 40% lower than last year.
Now we get to the dividend. As expenses pile up and losses increase, net cash is also on the decline. Management needs to shore up its cash to stay afloat, and it cut the stock's quarterly dividend from $0.24 to $0.05, or by nearly 80%. That wipes out one of the stock's most attractive qualities. At the current low price, the yield isn't terrible at 1.4%, but it can't be called a high-yielding dividend right now.
Is Paramount stock a buy, sell, or hold?
So far, even though he mentioned his worries about Paramount at the Berkshire Hathaway annual meeting last month, Buffett is holding on. But even Buffett himself has said that you don't have to make your money back the way you lost it. So if you own Paramount stock and have lost confidence, and if there are other investments out there that look like better buys, it may be time to trade in your shares.
Paramount stock is down 56% over the past year after a huge drop on the results of the first quarter. Shares are now trading at the dirt-cheap valuation of 0.3 times trailing-12-month sales.
I hesitate to recommend buying Paramount stock, even at this cheap price, for anyone thinking about starting a position and getting a good deal. A cheap stock isn't a bargain if it doesn't offer the opportunity to grow.
That doesn't mean I think Paramount's game is over. It owns valuable assets and is cutting costs to improve profitability, and streaming is a strong point in terms of growth. But for the time being, investors may want to watch from the sidelines until there's demonstrated improvement. In the classic buy, sell, or hold analysis, I would call Paramount a "hold" today.
