Paramount downgraded by Wells Fargo on worries over media ecosystem, declining EBITDA
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Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA) was downgraded by Wells Fargo on Tuesday, as the investment firm said it was "increasingly worried" about the linear media ecosystem and had concerns over its financials as a result.
Analyst Steven Cahall lowered his rating on Paramount Global (PARA) (PARAA) to equal weight from overweight and slashed the price target to $19 from $40, noting there is likely to be a "trough in earnings" even as streaming drives growth, but the firm's base case is now flattish to lower EBITDA.
Cahall said the firm has been impressed with how Paramount Global (PARA) (PARAA) has leveraged content, including Yellowstone, the Top Gun movie franchise, SpongeBob and sports to get to 46M Paramount+ subscribers at the end of the third-quarter. However, it looks like the linear ecosystem is "crumbling" and the company is likely to come under earnings pressure.
"Not so long ago it looked like a lot of Media stocks would pull off [direct-to-consumer] pivots, so they garnered higher multiples based on [sum-of-the-parts] valuation," Cahall wrote in a note to clients. 
The analyst added that with the linear ecosystem pressures and the competitive set in streaming, streaming businesses that are less than $10B "may very well have more like 10-15% margins, so the linear-to-streaming pivot is a lower multiple transition for all but the biggest." 
"With a more negative view industry-wide on linear we now think PARA will run-rate EBITDA below 2019 levels with average 2022E-27E EBITDA of ~$3.5bn," Cahall continued, adding that Paramount (PARAA) trades at 7 times long-term EV/EBITDA, which not considered cheap or expensive in this market.
Conversely, Warner Bros. Discovery (WBD) trades at 7.5 times EV/EBITDA, while Lions Gate (LGF.A) and AMC Networks (AMCX) trade at 10 and 4 times, respectively. 
Paramount Global (PARA) (PARAA) shares were little changed in premarket trading. 
The analyst added that there may be "harder choices ahead" for Paramount Global (PARA) (PARAA), especially if the linear media ecosystem and outlook play out as expected. The company may have to raise prices on streaming, which could hurt its subscriber count and raise churn or it may wind up having to merge to compete with the other media giants.
Last month, it was reported that Paramount Global (PARA) (PARAA) was looking at merging its Showtime OTT streaming offering and consolidating its content into its Paramount+ service. 
Analysts are mostly cautious on Paramount Global (PARA). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a HOLD. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates PARA a HOLD.