Good Morning!
As earnings season is coming to a close, it is almost time to dive back into the venture space. I have been prepping some deep dives on some of VCs hottest names, and I look forward to sharing them soon!
I also hope everyone is getting ready for US vs. Iran kicking off in just a couple of hours! I have fully recovered from Friday's game against England after standing for 90 minutes and biting on my shirt Kobe Bryant style. In the words of Ted Lasso: Believe!
Also, Lebron is just the GOAT on and off the court as he even has a handshake with the team photographer! Showtime! |
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Paramount: The Rollercoaster Continues |
Introduction Paramount Global. What are going to do with you…
In the 3 months since we last wrote about the company and their Q2 earnings, the stock has gone from $24 to $15 back to over $20 and down again to $18.
It feels very similar to the experience I imagine the bird in Tiny Wings (RIP) must have felt while I was playing the game on my iTouch in middle school. If you don’t get the joke really don’t worry about it. The crazy thing? I think this rollercoaster makes a lot of sense.
There are plenty of reasons to be bullish about the company including a likely 2-3x multiple to current value if acquired, A few percent yield, explosive streaming growth and more.
But there are also many reasons to be bearish including the fact that it is highly doubtful that the company is sold in the near future, dividend being at risk – which we will break down later, serious streaming losses ($1.2B in just the first 9 months and peak streaming losses aren’t until next year!), and tough macroeconomic and ad market conditions. What do you get as a result? A rollercoaster.
Let’s take a look at the Q3 earnings results before sharing some thoughts on the health of the dividend, long term streaming profitability, and a little interesting Netflix comparison. |
Third Quarter
In the third quarter, Paramount posted revenue of $6.9B and EPS of $0.39 vs. $6.6B in revenue and $.76 EPS in Q3 2021.
The increase in revenue was driven by strong performance in affiliate revenue and theatrical revenue (TopGun Maverick, Smile). The bottom line decrease was due to the investment in streaming and a tough advertising market.
Streaming continued to show strong momentum as Paramount+ added 4.6M subs in in Q3 taking total DTC subs for $PARA up to nearly 67M. Additionally, Paramount shared that they expect to go over 75M global streaming subs by the end of the year driven by international launches and a phenomenal content slate including Criminal Minds: Evolution, Tulsa King, 1923 (Yellowstone prequel), and TopGun Maverick arriving to streaming in December.
Additionally, PlutoTV continued its strong momentum growing to 72M MAUs and grew global total viewing hours double digits YoY continuing to grow their lead in the integral and fast growing FAST streaming space. From a cash flow perspective, Paramount did -$333M in FCF in Q3 taking their cash balance down to $3.3B and debt to $15.8B.
Alan’s Q3 Angle: Overall, the company had a solid quarter and the thesis continues to be intact. Streaming is growing at a rapid pace, but coming at a serious cost losing $1.2B in the first 3 quarters alone. Paramount management believes that even though OIBDA is decreasing due to investment in streaming and tough ad markets, they can offset this with decreases in working capital (layoffs) to protect FCF – which will be really important if Shari wants to continue to receive her dividend!
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Dividend
Paramount has just under a $700M annual dividend expense – around $60M in preferred & $625M in common dividend. The company also has $3.3B in cash on hand & $15.8B in debt, giving them around 4.8x leverage.
Historically, FCF has gone a long way to funding the dividend with $1.8B in 2020 (which was aided by lack of production expenses due to COVID) and FCF in 2021 of $481M. However, this year, the company has ($9M) in FCF YTD.
RBC Capital expects $PARA’s FCF in Q4 to be $64M and for 2023 to be between $51M & $158M. This means that next year, if $PARA will continue to pay their dividend, their cash balance will likely take a ~$500M hit, drop into the ~$2.8B range and give the company a ~5.5x leverage ratio at the end of '23. These RBC forecasts already implied a cut due to the current macro environment, but if the ad market gets worse and streaming stays expensive for the next several years, the dividend is in serious jeopardy. Paramount was expecting to get a serious cash infusion from the $2.1B sale from Simon and Schuster to Penguin Random House, however, the FTC blocked the deal due to antitrust reasons. Paramount gets a nice $200M break up fee, and will likely be able to sell the asset to other bidders with relative ease, but all of this will take time. If S&S went through, I think the dividend would have been safe, but it didn't, yet again bringing the divvy into question.
I also think that $PARA's stock would take a serious hit if the dividend were to be paused or decreased. This is likely a big reason why there is such a big short position in the company as they are banking on this dividend cut.
Interestingly, when Mario Gabelli, the billionaire investor with a serious slug of $PARA was talking about the company on CNBC, it sounded as if he actually would be pro the dividend cut. Gabelli called $PARA a double or a triple from these current levels - especially if the company were to look to spin-off their legacy assets and do some other financial engineering.
It is also important to note, that of course $PARA would love to continue to protect their balance sheet and cutting the dividend would do just that.
Interestingly, however, there is serious precedent for the company operating on an incredibly leveraged balance sheet.
When Viacom and CBS merged together in late 2019, the new combined entity had $632M in cash and 19.7B in debt representing net debt of $19B. To make the situation even a little more complicated, $PARA does have a committed $3.5B credit facility they could tap into. TL;DR – The dividend is in serious doubt, but could stick around if management wishes. |
Netflix & Zaslav
Human beings are funny little things. It was not too long ago when all anyone on Wall St. cared about was streaming subs and now it is all about profitability. Human perspectives can change on a dime and apply certain values/principles one place and different ones in others. I did an interesting little rewind back to Netflix and their valuation back in 2016.
In early 2016, Netflix stock had a $40B market cap. Total revenues were $6.7B in 2015. $645M of those revenues were from the DVD business which was decaying and had 50% margins. (I assume it was FCF accretive.) Netflix had a loss of $920M FCF in FY 2015, meaning the FCF loss was from streaming was likely around $1B The company had 70M global streaming subs. The company was trading at 6x sales.
Leaving 2022, $PARA will have over 75M global streaming subscribers at a $6B revenue run rate. The losses from streaming will likely be around $1.5B, however, due to legacy revenues, company wide they will be FCF positive. $PARA also has the 72M PlutoTV subs on top of the 75M streaming subs. Netflix received a significant multiple for their streaming ambitions in 2016 and Paramount's streaming ambitions in 2022 receive a negative EV. Interesting. If Wall St. gave $PARA streaming just a 2x revenue multiple, the stock is likely a double from here, however, that is unlikely to happen. This is something I will continue to dig into and think about as I think it is very fascinating!
There is also significant conversation around the fact of whether streaming can be profitable. I think the content/legacy media companies will have all of the leverage if the content is there and tapping into an international TAM much greater than that of legacy and the presence of advertising can make streaming a sweet business. The great David Zaslav also through an interesting little golden nugget into the conversation.
“Right now, we can get 30 million people watching Euphoria, but they can come in for two months and watch Euphoria and then leave... There's a lot of companies that have businesses where if you want to come in, they have the majority of people are there for the year. So, I think that over the next couple of years, there's a lot of things that are going to rationalize this marketplace and move away from this irrational race for subscribers. I think you're already starting to see it."
Zaslav is focused on making money in streaming and it looks like he could be considering a yearly subscription. This would make the economic outlook and health of streaming so much easier to forecast and able to generate profit for the companies behind them. Specifically, with Paramount+, if you are a diehard Yellowstone fan, NFL, Nickelodeon, South Park (in a couple years), Star Trek, Criminal Minds & NCIS, a $100 annual subscription does not sound that bad does it. Add in distribution deals with companies like Walmart and strong monetization from advertising and you have a real powerful business. I am hoping Zaslav leads the way and makes this vision a reality. |
Final Thought
I can literally talk and write about Paramount for days, however, sadly, other people do not feel the same way, and I have to cut my thoughts off at around 1,500 words.
The Paramount investment is a fascinating one, and I continue to be a believer in the company. That being said, with risks around the dividend, The Crossover Portfolio could continue to look to lighten our position up.
Warren Buffett and Berkshire Hathaway continued building their stake in Paramount Global by buying another 12M shares taking their stake to over 91M shares, representing ~12% of the company.
Buffet's position in the company, along with Gabelli, Ariel Fund, and many others, keeps my confidence that I am reading this thing the right way! -Alan |
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Missed a recent edition? That's okay! Now you can just click on these links below to catch up on what you missed! |
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Carta shared a great chart breaking down the M&A environment
- It looks as if a significant amount of the M&A going down is at the later stage levels from $25M-$100M and $100M+
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Everyone is calling for 2023 to be a year with massive M&A, and I am with the masses on this one. 2023 will be a big big M&A year. Buckle up!
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I have always thought I am a Boomer stuck in a Genzers body. After seeing this chart, I am 100% confident that is the case. Why? Because this chart makes me very happy. What Genzer could get this excited about shipping rates coming back down to pre-covid levels! This one!
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Just as the supply chain seems to be normalizing, sadly, there are new threats in the way including concerns of political climate and China and the US rail system.
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Here are some jobs that I’m curating in finance and tech. Use this link to submit a role to be featured if you’re looking to hire.
Director of Corporate Development @ Robinhood
Robinhood is seeking a Director of Corporate development with 10+ years of experience investing. This position includes analyzing Robinhood’s strategic landscape and managing M&A transactions.
Manager, Product Analytics @ Groupon
Interesting opportunity to lead a team of Product Analysts committed to improving Groupon's consumer experience. This position requires 3+ years of experience as an analyst. Definitely worth taking a look if the fit is right!
Research Engineer @ Descript
Descript is a venture building the next-generation platform for the creation of audio and video content. Descript is looking for someone to solve problems for media creation and editing, as well as, designing and develop new algorithms for media synthesis. I think this company is incredible and just getting started. |
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This Twitter thread from Pomp is a bad look
- Sad stat about GenZers and working from home
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Literally my Dad when we watch football together
- Casemiro! Golazo!!!
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This fan is a legend for hitting the half court shot at the Lakers game for $75K
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Thanks for the read! Let me know what you thought by replying back to this email. — Alan
Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter. |
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