What happened

Shares of Paramount Global (PARA -3.94%) fell 34.8% in May 2023, according to data from S&P Global Market Intelligence. The media veteran's first-quarter report didn't just fall short of expectations, but it also inspired a dramatic dividend cut. Later, its largest shareholder publicly wondered why he even holds this stock.

So what

Paramount's first-quarter sales dropped 1% lower year over year to $7.27 billion. The Paramount+ streaming service pulled its weight with a 39% revenue increase, balancing out a large drop in the TV segment's ad-based sales. But the streaming channel remained firmly unprofitable and all three of Paramount's reporting segments saw either falling operating profits or larger operating losses. Hence, adjusted earnings fell from $0.60 to $0.09 per diluted share. The average Wall Street analyst had expected earnings of roughly $0.17 per share on sales near $7.42 billion.

In an effort to conserve cash for the benefit of content production and general financial flexibility, Paramount cut its dividend payouts dramatically. The company has been paying out $0.24 per share, per quarter, for several years but the next payout will be worth $0.05 per share. The effective dividend yield plunged from a generous 4.1% to a thrifty 0.9%. It was no surprise to see Paramount investors walking away from that greatly reduced cash-sharing policy. Thanks to the price drop, Paramount's annual yield now stands at 1.3%.

Warren Buffett's Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) is Paramount's largest shareholder nowadays, and the Oracle of Omaha addressed this disappointing turn of events at Berkshire's annual meeting two days later. He mused about the difficulty of creating growth in the media sector, suggesting that Paramount may need to raise its subscription prices in order to make a profit in the streaming video market. And that's not an easy change, either.

"The eyeballs aren't going to increase dramatically, and the time they can spend is not going to increase dramatically, and you've got a bunch of companies that don't want to quit," Buffett said. "And who knows what pricing does under that? Anybody tells you what they know what pricing will do in the future is kidding themselves."

That's not a ringing endorsement of Berkshire's Paramount investment, which started just one year ago. The insurance-based investment conglomerate is hanging on to its $3 billion media studio investment, according to the latest available reports, though things may have changed after the March 31 cutoff date for the most recently completed reporting period.

Now what

To be clear, Paramount's first-quarter results were not far removed from the management team's official guidance. The company is not in the habit of providing detailed financial guidance but CFO Naveen Chopra sketched out a first-quarter bottom-line earnings target of very approximately $0.08 per share in the previous earnings call.

Chopra also laid out an optimistic long-term plan, expecting ad revenues to start a robust recovery in the second half of 2023. A willingness to focus on long-term plans despite some immediate financial pain is right in line with Warren Buffett's business philosophy, so maybe we shouldn't worry too much about Berkshire's ownership stake.

Paramount is knee-deep in a turnaround effort right now, and the stock trades at bargain-bin valuations. You can pick up a Paramount share for 0.4 times sales, and the company is valued at less than half of its current book value. In other words, many Paramount investors believe that running this movie and media business is much less valuable than simply selling off all of Paramount's assets and handing out the resulting cash to shareholders.

It's not easy (and often quite silly) to bet against Warren Buffett and his top-notch team of investment researchers, but Paramount is still far from my top recommendation in media streaming or digital advertising right now.