Paramount Global's (PARA -2.22%) (PARA.A) stock price jumped over 20% after its third-quarter business update was released on Nov. 2. The media giant reported revenue mostly in line with expectations, but adjusted earnings per share of $0.30 were much higher than the $0.11 consensus EPS estimate.
Management is now calling for "significant earnings growth" in 2024, so now might be a good time to revisit this beaten-down media stock. Here are three things about Paramount's business that smart investors need to know before deciding on the stock.
1. Paramount is on a roll at the box office
One reason for the stock's 27% slide over the last year is mounting losses to support growth in streaming. As Netflix showed over the last decade, it takes time to build a highly profitable streaming service. But one reason to like Paramount is the recent run at the box office.
Paramount saw its market share of gross box office receipts fall in the last decade, but over the last two years, it has made a big comeback. Theatrical revenue grew 63% year over year in the third quarter, which boosted overall revenue from filmed entertainment by 14%. Growth was driven by the blockbuster releases of Mission: Impossible -- Dead Reckoning Part One and Teenage Mutant Ninja Turtles: Mutant Mayhem.
Year to date, filmed entertainment revenue is down 17%, but the decline was expected. Paramount is coming off a monster year in 2022 with six films that debuted at No. 1 in the U.S.
These releases are linked to the robust growth happening at Paramount+, where subscriber gains drove a 38% increase in revenue for the direct-to-consumer segment. These movies not only end up as exclusive content for streaming services but also boost revenue in other ways. For example, the success of the new Turtles movie drove $1 billion in global retail sales for toys, which benefits Paramount.
2. Paramount has a large entertainment library
Paramount Pictures has a long heritage in Hollywood dating back to 1912. That has helped it build up a deep catalog of films, which gives the company some leverage as it works to win subscribers in the streaming wars.
Last year's Top Gun: Maverick pulled in $1.5 billion at the global box office, making it one of Paramount's highest-grossing films of all time. Moreover, Paramount has another tool to drive growth with professional sports rights on CBS. The company has great content to drive growth in streaming. Over the last year, the service added 17.4 million subscribers, reaching a total of 63.4 million at the end of the third quarter.
In light of this valuable content, Paramount+ is one of the cheapest services compared to other offerings from Walt Disney's Disney+ and Warner Bros. Discovery's Max, but management says it expects to increase average revenue per subscriber by 20% in 2024. Raising prices is an untapped revenue opportunity that could benefit the stock.
3. The stock is cheap ahead of earnings growth
The company is still wrestling with a challenging economy that has delayed the expected recovery in advertising. Revenue from Media, the segment that generates nearly two-thirds of the company's revenue, fell 8% year over year in Q3. But despite the softness in its biggest revenue driver, the stock still looks cheap.
Paramount said it reached peak investment in streaming content a year ahead of schedule, which should allow for earnings growth next year. Current Wall Street estimates have earnings improving to $1.19, which puts the stock's forward price-to-earnings ratio at just 10. The cheap valuation has attracted the investment of Warren Buffett's Berkshire Hathaway and a few other notable value investors.
With narrowing losses in the streaming business, the main headwind standing in the company's way is weak ad spending. A key catalyst that could boost the stock price is a sale of one or more assets. The company's Showtime network has recently been caught up in sales rumors, but there's no indication when or if any asset sales will happen.
