The deterioration of the traditional TV business is eating into Wall Street’s enthusiasm for media companies as they transition to streaming.
Wells Fargo media analyst Steven Cahall on Tuesday (October 4) downgraded Paramount Global stock to equal weight from overweight and chopped his price target for Paramount shares from $40 to $19.
Paramount shares closed at $19.62 on Monday. In mid-day trading Tuesday, the stock was up to $20.
Cahall said he’d been bullish on Paramount’s execution of its streaming strategy, combining franchise series like Yellowstone, tentpoles like Top Gun: Maverick, kids shows like SpongeBob SquarePants and sports with the NFL and soccer.
“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,” Cahall said.
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In other words, a few months ago having 46 million Paramount Plus subscribers would have made Wall Street happy. “But now, the linear ecosystem is crumbling, in our view, and it threatens to create significantly more earnings pressure for companies like Paramount,” Cahall said. “[Direct-to-consumer] could be a good business, but it's likely going to take a lot of time to scale.”
That earnings pressure might force Paramount to have to choose whether or not its NFL games should be on streaming, if it can raise prices and risk churn and ultimately whether consolidation is in the future, Cahall said. Putting the company up for sale is on the short list of ideas that could make Paramount stock more attractive, he said.
“The cross-currents Paramount faces are not new, but we think the strength of them is increasing rapidly,“ Cahall said. ”Cord-cutting exacerbated by recession coupled with market share battles in streaming could render earnings more challenged than our updated view implies.”
LINEAR DECLINE'S IMPACT
In a separate report, Cahall takes a broader look at how the linear decline will impact the media business.
He sees linear earnings falling faster than previously anticipated and cost-cutting accelerating. At the same time, profit margins for traditional programmers are in the 40% to 60% range, resulting in over-earning by companies in the sector.
Cahall forecasts that cord-cutting could soon approach 12% on an annual basis, with pay TV at 50 million subscribers by 2027-28 and 40 million a decade from now.
That would lead to a drop in linear earnings to $8 billion and a 10% margin in 2032 from $33 billion and a 37% margin in 2022.
“Streaming margins are still being proven and it’s overly optimistic to assume that they can approximate linear anytime soon,” he said.
The decline in linear profits might force media companies to make important strategic decisions. The linear business might no longer support expensive sports rights, which means Warner Bros. Discovery might not renew its NBA rights in their current form, Cahall said. With the NFL, CBS might have to consider an early exit and Fox might have to find a digital partner with which it can sub-license rights. Disney might choose to take ESPN full a la carte sooner as cord-cutting accelerates. Such a move would speed up the decline of traditional pay TV even more.
Consolidation in media in this environment might be required. Comcast is most likely to add assets because it has a strong benefit and needs to bolster Peacock.
In addition to cutting his rating on Paramount, Cahall cut his target stock prices for AMC Networks, Comcast, Lionsgate and Warner Bros. Discovery.
Cahall concluded that among the media companies he covers, The Walt Disney Co. is the best positioned. He said Fox has optionality; Warner Bros. Discovery might not be able to top $14 billion in earnings before interest, taxes, depreciation and amortization; Paramount has lower earnings power than Wall Street expects; Comcast may not grow for a while, but will improve its competitive position; AMC Networks is likely to see declining EBITDA and free cash flow for the long term and Lionsgate likely recognizes the tough environment for Starz, hence its strategy to split or sell. ■
