It would be easy to presume Paramount Global (PARA -2.22%) is a lost cause. While its movie studio remains a powerhouse, its streaming business remains in the red -- and increasingly so. Its cable television channels (including Nickelodeon, Showtime, and MTV) as well as its broadcast network CBS are respectable platforms, but the cable TV industry itself is on the ropes.
And yet, Paramount is a company that's oh-so-close to greatness. Or if not, it's oh-so-close to being acquired. You may want to stake your claim while the stock's still down more than 80% from 2021's peak.
Don't misunderstand. Paramount shares could continue sliding lower. The market's pretty disillusioned with the company. It could be tough to change doubters' minds anytime soon, even with better results.
Given the risk versus the potential reward, however, Paramount's got a place in at least some investors' portfolios. The key is what it's about to become rather than what it is.
But first things first.
Paramount (like most of the rest) rushed into streaming
Paramount's roots are in the film industry, but it's been in the television business for about as long as television has been around. It's parent to broadcast network CBS, of course, but also owns the aforementioned Nickelodeon, Showtime, MTV, and others.
The advent of streaming established new opportunities for media players, which Paramount tapped as best it could at the time. Paramount+ launched in early 2021, and while it's been around since 2014, Paramount acquired the free-to-watch platform Pluto TV in 2019. The two services are now serving 60 million and 80 million viewers, respectively.
Except that user growth materialized during a time when most of the major streaming names didn't fully understand what the streaming business would become, or even should become. These companies, ranging from Walt Disney to Warner Bros. Discovery (just to name a few), simply knew Netflix was starting to seriously disrupt the entire television industry. That merited some sort of response, regardless of the cost.
To this end, Walt Disney's and Paramount's streaming operations are both still in the red, while Warner Bros. Discovery's direct-to-consumer business eked out the slimmest of first-ever operating profits for the quarter ending in March.
The future, however, is apt to look much better than the past.
Streaming's next necessary evolution is already underway
Why will the future look better than the past? Because Paramount (and its peers) are finally getting a handle on what their streaming operations can and cannot be.
And one thing they certainly can't be is small.
See, scale matters in this business. The cost of creating a TV show or movie is the same no matter how many people see it. As such, the more people who pay to see it, the more profitable that film or program becomes. So far, Paramount's spending on streaming content has grown in step with -- and exceeded -- streaming revenue.
Data source: Paramount Global. Chart by author. All figures are in millions of dollars.
Streaming's starting to achieve enough scale, however, that the cost/expense math is starting to make more fiscal sense. It's making so much sense, in fact, that Paramount is even rethinking its previous, lofty streaming-spending projections. CFO Naveen Chopra hinted earlier this year that Paramount may spend less on streaming in 2024 than the $6 billion that had been previously suggested. That cut will be made at least partly possible by the launch of a new service combining Paramount+ with Showtime.
More important, the streaming changes put in place so far are already "starting to deliver on the path to profitability," with streaming-content spending likely to peak this year -- profitability that CEO Bob Bakish also mentioned in Paramount's Q1 press release.
Something else streaming services can't be is a stand-alone product -- the market's just too competitive. They're often more marketable when bundled with another product or service, or bolstered with exclusive premium content.
Case in point: In September, retailer Walmart began offering free access to Paramount+ for Walmart+ subscribers, raising the appeal of Walmart+ while at the same time monetizing Paramount+ to a crowd that may not have otherwise been exposed. In the meantime, Paramount+ has forged relationships with Formula 1 racing.
Other relationships of this kind may already be in the works.
As for Pluto TV, while it doesn't turn as many investor heads as Paramount+, it should. Pluto TV is already a major name in the free ad-supported television (FAST) market, which is the future in a subscription-fatigued world. An outlook from market research firm Omdia suggests the United States' FAST market could grow from last year's $4 billion to $10 billion by 2027.
2 likely outcomes, both of which are bullish
So where's it all going? There are two prospective but distinctly different outcomes. But both are bullish.
The first possibility is that Paramount's streaming business eventually inches its way out of the red and into the black, just as Bakish and Chopra suggest will be the case. And, given the streaming evolution underway, that's not an unbelievable expectation. In the meantime, the company's film and TV businesses both remain firmly profitable. This net success could restore the recently cut dividend, bolstering the stock's ultimate upside. Mostly, though, it will bolster overall profits.
The second prospect is an acquisition of Paramount -- in whole or in parts -- en route to streaming profitability.
That's a possibility Loop Capital analyst Alan Gould says could be in the cards. He recently upgraded Paramount, penning "the bull case is that the financial pressure will force PARA to find a buyer and shareholders will achieve private market value."
And it's not the first time the prospect of a buyout's been raised. Indeed, Bob Bakish himself may be anticipating an acquisition following the sale of certain assets. Paramount's BET has reportedly been drawing interest from suitors, for instance, while the Simon & Schuster publishing business is officially back on the market. Earlier this year, Paramount reportedly turned down a $3 billion offer for Showtime.
The interest ultimately suggests Paramount is creating several marketable brands and services. It may only be a matter of time before the effort translates into a profit recovery or serious acquisition offers.
Of course, you'll want to own a position before either prospect starts gaining traction.
