In a significant move reflecting changing market dynamics, Wolfe Research analyst Peter Supino recently authored a report titled “Maybe We Have Different Dreams,” where he downgraded Paramount Global’s stock rating from “peer perform” to “underperform.” This decision came on the heels of the announcement of Paramount’s acquisition by David Ellison’s Skydance Media, prompting Supino to set a cautious $10 price target on Paramount’s stock.
Supino’s rationale for the downgrade centers on the resolution of uncertainty surrounding Paramount’s future, particularly the elimination of any potential breakup scenarios that were previously speculated upon. With the deal sealed, Supino believes the investment thesis now hinges critically on Paramount’s ability to navigate and capitalize on the direct-to-consumer (DTC) market landscape, and whether current market forecasts adequately account for the complexities and challenges ahead.
In his detailed analysis, Supino underscores Paramount’s heavy reliance on its TV Media segment, which currently drives over 60% of the company’s revenue and operating income before depreciation and amortization (OIBDA). This segment, rooted in traditional pay-TV economics, faces formidable hurdles in adapting to the shift towards digital streaming and content licensing models. The ongoing decline in linear pay-TV viewership exacerbates these challenges, with annual decreases in high single-digit percentages threatening to erode Paramount’s high-margin revenues from linear affiliate fees and advertising.
“While expectations are for improvements in DTC losses to mitigate the rate of OIBDA decline, the accelerated erosion of pay-TV viewership poses a significant headwind,” Supino cautioned in his report. He pointed out that Paramount’s efforts to transform its business model may be hindered by the entrenched dynamics of the traditional media landscape.
Despite the strategic potential of Skydance’s acquisition and its plans to realize over $2 billion in cost savings, Supino remains skeptical about the full execution of these ambitious initiatives. He acknowledges the strengths of David Ellison and his team at Skydance, recognizing their capacity to address Paramount’s DTC deficiencies through technological innovation, financial resources, and strategic alliances.
However, Supino expresses reservations regarding Skydance’s financial projections, which hinge heavily on the performance of legacy Paramount assets amid their ongoing decline. He questions the assumptions underlying Skydance’s forecast that legacy Paramount will generate approximately $2.4 billion in OIBDA by 2025 and 2026, factoring in significant expense reductions aimed at bolstering profitability.
In conclusion, while acknowledging the potential benefits of Skydance’s stewardship and its efforts to enhance Paramount’s operational efficiency and market positioning, Supino’s downgrade reflects concerns about the execution risks associated with navigating Paramount’s strategic pivot amidst a rapidly evolving media landscape. The transition from traditional to digital media models, compounded by competitive pressures and shifting consumer behaviors, presents substantial challenges that Paramount under new ownership must adeptly navigate to sustain growth and profitability in the long term.