Shares of Paramount Global (PARA -1.54%) (PARA.A -1.75%) have had a rocky ride to start the year. The company reported mixed results for the first quarter that included a slight drop in overall revenue reflecting the ongoing weakness in the TV advertising market. To top it off, management reduced the quarterly dividend, which didn't sit well with investors.
On the other hand, there are many companies struggling right now, but Paramount has unique assets that will continue to grow in value over the long term.
Investors are getting a bargain on an iconic film studio that has been on a roll at the box office and continues to report strong subscriber growth across its streaming services. Here's why investors could score big.
1. In-demand content
Paramount stock has tumbled well off its highs over the last year, but that is based on weak revenue results in TV media and losses from content spending to support streaming growth. The market is placing too much focus on what the company looks like now and not looking toward the future, because with the stock selling at a fraction of the company's annual revenue, also known as the price-to-sales (P/S) ratio, that's all that matters for investors to score handsome returns.
PARA PS ratio, data by YCharts.
The direct-to-consumer (DTC) business, including revenue from streaming services Paramount+ and Pluto TV, has been growing at a rapid rate, up 39% year over year in the first quarter. This growth puts the company in a strong competitive position.
Paramount+ now has 60 million subscribers, up from 36 million across all services just two years ago. DTC revenue doubled over that stretch and now makes up 20% of Paramount's business. It could end up driving most of the company's revenue.
Management is seeing subscribers join for more than just entertainment. They are coming for news and sports content, too, because the company also owns CBS and other networks. The bundling of Paramount+ with Showtime is a big opportunity to drive even more demand in streaming.
2. A strong content pipeline
Paramount's model of releasing blockbuster theater hits and then further monetizing those hits with demand in streaming is working nicely.
Top Gun: Maverick was a huge success at the box office last year, but it's still driving returns for the company, along with 1923, Mayor of Kingston, and Star Trek: Picard, by attracting subscribers in Paramount+.
After grossing more than $44 million in its domestic opening in March, Scream VI just rewarded Paramount+ in April with a strong reception by subscribers.
Another Tom Cruise movie, Mission Impossible: Dead Reckoning Part One, hits theaters in July and could produce a similar story for Paramount this year, with continued growth in the DTC channel following success at the box office.
3. A turnaround is coming into focus
The dividend cut was a risk that came to fruition. With that risk now fully reflected in the stock price, investors can look toward an improving ad market and cost-cutting to eventually lead to better financial results, and therefore lift the stock higher.
A key profitability metric that investors watch is free cash flow (FCF), which at Paramount plummeted to negative $933 million over the last year. Paramount generated more than $3 billion in FCF just a few years ago, but streaming is an expensive business that requires a lot of up-front capital to get off the ground.
PARA free cash flow, data by YCharts.
But that's why investors should like the stock at these lows. Most of the investments in streaming are behind the company. In the near term, management is improving the cost structure by exiting noncore businesses.
Meanwhile, during the first-quarter earnings call, management reported stabilizing trends in the ad market. This puts the company on a path to return to top-line growth and begin posting improvement on the bottom line. Management aims to return to positive FCF in 2024. This is a big catalyst for the stock.
Paramount stock trades at just seven times the company's average FCF over the last five years. With the greater scale the company is achieving through streaming growth and blockbuster films, the future is bright for this top entertainment stock.
