3 Ways to Play This Down and Out Media Stock

Paramount Global (PARA) announced last week that it was integrating Showtime into its Paramount+ streaming platform later this year. As part of the move, it will take a $1.5 billion write-down. 

While a $1.5 billion impairment charge isn’t good news, it was necessary if the media company wanted to stay competitive in the streaming wars. As part of the integration, it is raising its premium tier by $2 to $11.99 monthly. 

PARA Stock lost some of its 2023 gains last week after reporting a significant decline in GAAP and non-GAAP earnings. Fortunately, it got some of those losses back on Thursday and Friday. Overall, Paramount Global’s stock is up nearly 37% year-to-date. 

If you’re a contrarian investor -- the 20 analysts that cover PARA according to Barchart.com data give it a Hold rating (2.55 out of 5) with a mean target of $21.16, more than $2 below where it’s currently trading -- I’ve got three ways to play Paramount Global with varying degrees of risk.

The Riskiest Bet Is PARA Itself

While the analysts don’t like Paramount Global’s chances, I’m a lot more optimistic. I continue to subscribe to Paramount+. Adding Showtime for an additional $2 won’t change my opinion of the streaming platform. I like it compared to Disney (DIS) and Amazon Prime, two other platforms I use. As for Netflix (NFLX), nobody can keep up with their level of content development. 

In 2022, Paramount Global had revenue of $30.15 billion, 5% higher than in 2021. leading the charge was a 47% increase in Direct-to-Consumer revenue (Paramount+, etc.) and a 38% increase from its Filmed Entertainment division. Those two divisions account for about 29% of its overall revenue.  

On the bottom line, its operating income before depreciation and amortization (OIBDA) fell 26% to $3.28 billion from $4.44 billion a year earlier. 

I'm a glass-half-full person, so the fact it is still generating decent profits suggests that PARA’s upside exceeds the downside.

And let’s not forget that its collection of assets is likely worth a lot more than its current enterprise value of $26.8 billion. According to Needham analyst Laura Martin, the company’s TV and film library alone is worth significantly more than the $8.5 billion paid by Amazon (AMZN) for MGM’s library.

Whether Paramount Global is sold off piece by piece or acquired by someone larger, the price will be higher than $23 a share.   

A Rising Tide Lifts All Boats

Suppose you’re considering gaining exposure to Paramount Global but don’t want the higher risk attached to owning it directly. In that case, you could always buy an ETF that allocates a decent amount to its overall holdings.

If you want to go this route, there are two ETFs to consider: the Invesco S&P 500 Equal Weight Communication Services ETF (EWCO) and the Invesco S&P Ultra Dividend Revenue ETF (RDIV). 

The former invests equally amongst the 25 communications services stocks in the S&P 500. It rebalances four times yearly in March, June, September, and December. Charging 0.40% annually, it gives each stock an approximate weighting of 4.0% on the rebalance. PARA is currently the third-largest holding at 5.18%.

The latter tracks the performance of the S&P 900 Dividend Revenue-Weighted Index, a collection of the 60-highest-yielding stocks from the S&P 900 -- combination of the S&P 500 and S&P 400 -- and weights each holding by revenue. The portfolio is rebalanced and reconstituted quarterly. It charges 0.39%. PARA is the largest holding at 5.57%.

If you are more interested in gaining exposure to communication services stocks overall, EWCO is the way to go. Otherwise, I’d be more inclined to get my PARA exposure through RDIV, which has more than $1 billion in total net assets and is more diversified by sector.

Warren Buffett Likes PARA

I put Berkshire Hathaway (BRK.B) last in terms of risk because I consider it a mutual fund that doesn’t charge management fees.  

Amongst the many changes to the Berkshire portfolio by Warren Buffett’s holding company in the fourth quarter was the addition of 2.42 million shares of PARA stock. Berkshire now owns 93.64 million shares representing 15.4% of Paramount Global’s outstanding shares. The holding company is the largest owner of Class B stock.

In recent years, Buffett has been more inclined to pay a fair price for a great company than a great price for a fair company. Therefore, the fact he continues to buy shares in Paramount Global suggests he believes the company is in better shape than analysts give credit for.

One statistic from the fourth quarter that may have caught the Oracle of Omaha's eye is the number of subscribers it added to Paramount+. It finished the fourth quarter with nearly 56 million subscribers, 9.9 million higher than in Q3 2022. For all of 2022, it grew Paramount+ subscribers by 70%.

As for its FAST (free ad-supported television) streaming platform, Pluto TV, added 6.5 million subscribers in Q4 2022. For 2022, it added 14.1 million, a 22% increase over 2021, to 78.5 million. In addition, its direct-to-consumer business increased revenues by 47% to $4.9 billion. 

You can’t go wrong holding BRK.B.  

• Markets Today: Stocks Under Pressure from Fed Policy Concerns
• While Corn Hibernates, Let's Visit Brazil
• Option Volatility And Earnings Report For Feb 21 - 24
• Stocks Set To Open Lower As Investors Await FOMC Minutes