Second-quarter Paramount subscription growth expected to slow
Analysts now see a slowdown in the ad market impacting Paramount, but “Top Gun: Maverick” and a big buy-in from Warren Buffett are pushing the value up.
Wall Street analysts are backtracking on their expectations for Paramount Global ahead of its second-quarter earnings report next month, as several companies expect Paramount+ to report around 4 million net subscriber additions. Compare that with the mountain of subscribers, 6.8 million, Paramount+ added in the first quarter. And an industry-wide advertising crisis, coupled with subscriber losses on other Paramount streaming services, led Guggenheim to lower its share price target for the second time this year.
But don’t think Wall Street is canceling Paramount, which garnered renewed attention after ‘Top Gun: Maverick’ became the year’s biggest box office hit and Warren Buffett’s company bought a $2.6 billion stake in Paramount in May. Like Mav in the cockpit, Buffett is used to knowing what he’s doing.
Paramount has outperformed nearly all of its media peers this year, its stock down 19.57%, trailing only Fox, which is down 11.92%. Compare that to Netflix, down more than 68% year-to-date. Paramount also outperformed the Nasdaq Composite, on which it is listed; the index is down 26.6% this year.
Still, Guggenheim analyst Michael Morris this week lowered his Paramount share price target (PARA) from $40 to $35 a share, while maintaining a “buy” rating. It expects Paramount+ to report 4.1 million net adds for the second quarter, down from its previous expectation of 4.5 million. Similarly, Wells Fargo on Wednesday forecast 4 million net additions for the service (5 million excluding the impact of Paramount’s suspension of Russian operations). Wells Fargo’s price target of $60 remains unchanged.
Paramount stock closed at $25.90 on Thursday, up 5% over the past five days. That’s just north of its 52-week low of $23.69. If you follow the advice of these two companies (and Buffett’s example), Paramount Global stock looks like a bargain.
While Paramount+ and ad-supported free-to-air (FAST) television platform Pluto TV are getting the most attention, Paramount Global has other services in its streaming arsenal — and analysts expect bad news. news there. Wells Fargo predicts that Showtime OTT, Noggin and BET+ will lose around 600,000 subscribers. Factoring in that, as well as the impact of Russia’s exit, analysts expect Paramount Global to see just 1.3 million streaming net adds for the second quarter. (Note: the consensus forecast is 2.7 million listings, but other analysts may follow suit by lowering their own estimates.)
“We believe PARA is attractive,” the Wells Fargo memo read. “The big unknown is the advertising market.”
A weak advertising market is not only a primary problem. Analysts say advertising budgets are expected to shrink as companies cut costs in anticipation of a possible recession. But it’s especially painful for Paramount, whose Pluto TV is the cornerstone of its direct-to-consumer strategy. “We believe FAST ad dollars tend to be dragged down first during pullbacks,” the Wells Fargo analysts wrote. That, coupled with the impact on linear TV ads, led analysts to lower their expectations for Paramount’s total ad revenue by 4.2% for the quarter.
Wells Fargo now expects Paramount to bring in $1.23 billion in direct-to-consumer revenue in the second quarter, down 3.8% from its previous expectation. This is due to both the impact of fewer subscriptions and a weaker advertising market; analysts lowered their revenue forecast for Pluto in the second quarter by nearly 10% from previous estimates.
An overall drop in ad spend is bad news for Disney and Netflix — both plan to introduce ad-supported tiers for their flagship streaming services by the end of the year. And the moderation in earnings expectations from Paramount comes as the industry continues to recover from the unprecedented first-quarter subscriber slump at Netflix; the streaming leader has warned that more losses are expected this year. In addition to commercials, Netflix’s comeback plan also included two rounds of layoffs.
The “chilling effect” of Netflix’s first-quarter results is a “big deal” at streaming-centric media companies that are trading well below certain targets, an industry watcher told IndieWire for this report. story. Just like macroeconomic fears, like worry about a coming recession, added the person, who spoke on condition of anonymity. Paramount believes that a diverse media portfolio – from blockbuster movies to CBS to Pluto TV and everything in between – and the non-cannibalistic way in which it manages the specific film/marketing/streaming triangle is the best way to run a business. of media in 2022.
As of March 30, Paramount+ had nearly 40 million subscribers. Netflix had 221.6 million, Disney+ (excluding Hotstar) had 87.6 million, HBO and HBO Max combined for 76.8 million, and Peacock had 13 million paid subscribers (and 28 million monthly active users) . Bakish said earlier this year that he expects Paramount+ to reach 100 million subscribers by 2024, up from its previous target of 65 million to 75 million.
Wells Fargo sees good things on the horizon for Paramount. Paramount+ recently benefited from a deal with T-Mobile, the success of the “Halo” series and a deal that brings together European streamer Sky Cinema with Paramount+. Overall, analysts expect the deal with Sky to attract 9 million subscribers after the package launches in other markets later this year.
Another bright spot for the second quarter: Wells Fargo raised its revenue estimate for Paramount’s filmed entertainment division by 92.6%, thanks in part to “Top Gun 2” grossing $1.2 billion. Still without a release date, Paramount — and movie theater owners — haven’t lost that feeling of love for “Maverick” just yet.
Tony Maglio contributed reporting.