Wells Fargo analyst Steven Cahall has issued his second downgrade for Paramount Global in less than a month, rating the company's shares as “underweight” and cutting his stock price target from $19 to $13.
In his earlier Paramount downgrade on Oct. 4, Cahall slashed his price target from $40 a share to $19, noting that Wells Fargo had become "increasingly worried about the linear ecosystem cross media."
It made sense following NBC's broadcast premiere-week with a 1.0 rating in the key 18-49 demo, and Comcast's disclosure last week that cord cutting for the No. 1 pay TV operator in the U.S. has reached a rate of 10.6%.
Also read: David Zaslav and the Great 'Course Correction’: Why Is He Betting on the Past? (Bloom)
But at the time, the analyst did indicate bullishness regarding Paramount's "content and streaming execution."
On Monday, however, he wrote that Wells Fargo "can no longer justify [Paramount's] premium multiple amid our more negative view on linear trends and an uncertain direct-to-consumer outlook. ... 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."
Paramount Global was down over 3% as of midday trading Monday and is transacting at just over $18 per share. The company is trading at roughly 8.5 times its EBITDA for calendar year 2023, Cahall said, and he thinks the target "multiple" should be around 7 times EBITDA, or $13.
Paramount finished the second quarter with 43.3 million direct-to-consumer streaming subscribers, adding 4.9 million during that three-month period. Despite this customer growth, Cahall doesn't seem convinced that DTC streaming will generate the kind of business that can replace linear TV and theatrical distribution anytime soon.
"We struggle to value DTC without a clear path to solid profitability," he wrote in his latest report, suggesting that Paramount "shift strategy."
His specific suggestion to Paramount: "Become an arms dealer," existing primarily to produce and sell content to third-party platforms, a business model that Sony has successfully adopted.
Under that scenario, Cahall said Paramount could drive a "Fox-esque" 6.5 times multiple and be worth $26 a share. ■
