Wells Fargo analyst Steven Cahall had a Halloween surprise for investors, downgrading his rating on Paramount Global shares to “underweight” and cutting his stock price target from $19 to $13. And that even though he had just in early October downgraded the stock from “overweight” to “equal weight” and slashed his price target from $40.
“We’ve been bulls on Paramount’s content and streaming execution. While those aspects have trended well – and credit due to management – it increasingly feels like a myopic view on the stock,” the analyst had explained his first downgrade back at the start of the month. “We’re increasingly worried about the linear ecosystem across media, and this strips away visibility into what we were playing for as bulls: a trough in earnings with streaming driving growth on the other side.”
So why is Cahall even more bearish on Paramount’s stock now? The stock has done too well despite challenges for media and entertainment companies, he argued.
“We can no longer justify its premium multiple amid our more negative view on linear trends and an uncertain direct-to-consumer outlook,” he explained in his Monday report entitled “Tougher to Underwrite Strategy and Premium.” “Paramount is trading at around 8.5 times our estimated calendar year 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) versus Warner Bros. Discovery at seven times, Fox Corp. at six times and AMC Networks at five times.”
Instead, Cahall said he would “anchor Paramount’s” valuation to its media peers at seven times enterprise value/EBITDA, which leads him to $13 per share.
“We do see opportunities for Paramount to unlock value, but don’t think they’re currently under consideration,” the Wells Fargo analyst argued. Cahall also shared some thoughts on how this unlocking of value could work for the entertainment company. For example, he discussed the success and outlook of the company’s own streaming services, led by Paramount+.
“A strategic shift would make us more positive. While management is largely playing the hand it was dealt, we think Paramount either needs to shift its strategy or accept valuations closer to Warner Bros. Discovery and Fox,” he wrote. “Paramount’s content is undoubtedly valuable, but self-distributing via direct-to-consumer (DTC) that may not scale devalues it since it doesn’t monetize as effectively. We struggle to value DTC without a clear path to solid profitability. Alternatively, Paramount could become an arms dealer and at a Fox-esque 6.5 times … multiple be worth $26 per share.”
Or, so Cahall, the conglomerate could look for deal options. “It could pursue split/sale strategies like Lionsgate, with Paramount’s studios arguably worth $30 billion enterprise value,” he wrote. “Such moves would signal a value-maximizing legacy. We do not believe these are currently under consideration though.”