Investing guru Warren Buffett is renowned for his stock selection skills, but one stock his company, Berkshire Hathaway, purchased has not performed well in 2023. That stock is entertainment giant Paramount Global (PARA -2.22%). Its class B shares took a massive hit in May after the company slashed its dividend. And its stock price has continued to sink, hitting a 52-week low of $12.56 on Sept. 22.
With its share price still hovering near this low, does it make sense to heed Berkshire's example and buy shares? Let's dig into Paramount to see if following in the footsteps of the famous investor's company makes sense in this case.
Understanding Paramount's challenges
Paramount is undergoing a transition as consumers abandon traditional linear TV for streaming services. This creates a challenge for Paramount's business because the bulk of its revenue comes from its TV networks, such as CBS.
Of the $7.6 billion the company made in the second quarter, $5.2 billion came from its TV media division.This division saw its year-over-year revenue decline 4% in 2022, and 5% in the first half of this year. But as a result of the consumer shift toward streaming, Paramount's direct-to-consumer (DTC) division, which encompasses its streaming businesses, experienced astounding revenue growth.
Paramount's DTC division saw year-over-year revenue jump 47% in 2022, and 39% through the first half of 2023. Even so, the DTC business accounted for only $1.7 billion of Paramount's $7.6 billion in Q2 revenue. Moreover, the division isn't profitable. The DTC segment's Q2 expenses totaled $2.1 billion against its $1.7 billion in revenue. So now, Paramount is focused on growing its streaming sales and achieving profitability.
Paramount's path to success
To that end, the company increased the price of its Paramount+ streaming service this year, but added its premium Showtime content as a carrot to retain subscribers. The move also allowed Paramount to reduce costs by folding Showtime's separate streaming service into one platform.
In addition, Paramount is taking a nuanced approach to growing DTC revenue and profitability by analyzing its streaming data to understand the TV shows and movies its subscribers care about now. This approach decreases costs by enabling the company to zero in on the types of programs to produce more of in the future, as well as the content that reduces subscriber attrition.
The approach is working. The company exited Q2 with 60.7 million subscribers to its Paramount+ service, a substantial increase from last year's 43.3 million. And according to CFO Naveen Chopra, "We expect 2023 to be our peak year of D2C investment, with significant growth in consolidated earnings in 2024."
That earnings growth comes down to Paramount's effectiveness in producing revenue from its deep bench of popular brands, such as Showtime, Nickelodeon, Comedy Central, the Transformers and Star Trek franchises, and more. Paramount generates income from this content through four primary sources: advertising, affiliate and subscription, theatrical, and licensing sales.
The first two of these sources accounted for 74% of Q2's $7.6 billion in revenue. Digging deeper into these areas, Paramount's advertising revenue dropped 6% to $2.4 billion in Q2, due to a downturn in the advertising industry as 2023 digital ad spending is forecast to see its slowest growth in 14 years. But the ad industry is expected to bounce back in 2024, so Paramount's advertising fortunes should improve.
Affiliate and subscription revenue saw a 12% year-over-year jump in Q2, reaching $3.2 billion, as Paramount's streaming services grew subscribers. In addition, Paramount isn't reliant on its DTC businesses alone to deliver revenue growth. The company earns fees by distributing its content across various providers, including Amazon and Roku.
Paramount is also working to reduce its debt of nearly $16 billion. That's one of the reasons why it cut its dividend as it redeploys its cash. And in Q2, the company sold its publishing division, Simon & Schuster, for $1.6 billion, which will also help Paramount pay down its debt.
To buy or not to buy Paramount shares?
The strategy Warren Buffett's Berkshire Hathaway will ultimately take with its Paramount stake is unknown at this time. But with its roster of brands, advertising's eventual recovery, and ongoing DTC subscriber growth, Paramount looks positioned for improved performance going forward. For the patient investor willing to ride through Paramount's business transformation, the decline in share price presents a buy opportunity.
For investors who are more risk averse, you may want to wait a few quarters to see if the company can successfully continue growing streaming subscribers and bring its DTC business to profitability before deciding whether to invest.
