“Maybe We Have Different Dreams.” That was the headline of Wolfe Research analyst Peter Supino’s Tuesday report, in which he downgraded his stock rating on Paramount Global from “peer perform” to “underperform” following news of its deal to be acquired by David Ellison’s Skydance Media. He has a $10 price target on the stock.
“With a breakup of the company off the table, the investment debate simplifies: can Paramount invest profitably in direct-to-consumer (DTC)? Are forecasts low enough?” he wrote. “Respectively, we are cautious and negative.” Supino explained that with the deal agreed, “we revert to the ever-pressured fundamentals.”
That was particularly a reference to Paramount’s financials relying on its TV Media unit. “With 60 percent-plus of standalone Paramount’s revenue and operating income before depreciation and amortization (OIBDA) solely generated by the secularly declining TV Media segment, Paramount continues to face the challenges of recreating the linear pay-TV economics in a DTC/licensing business,” the expert highlighted. “While we do expect improving DTC losses to slow the rate of OIBDA declines, pay-TV viewership declining in high single-digit percentages per annum accelerates the loss of high-margin linear affiliate and advertising revenue.”
Cost savings, thanks to the Skydance team’s plans for $2 billion-plus in cuts, should help here. However, “the full extent of execution against the lofty cost savings ambitions” remains to be seen, Supino cautioned.
Despite all this, the Wolfe analyst had nice things to say about Ellison and “his formidable team” that is set to take over Paramount. Wrote Supino: “Skydance will address Paramount’s DTC scale deficit with tech, money, and partners.”
But he believes that Skydance’s financial forecasts could prove “optimistic as legacy Paramount declines.” Warned the analyst: “We are concerned about Skydance’s assumptions, implicit in yesterday’s presentation, that legacy Paramount will provide around $2.4 billion in OIBDA in 2025 and 2026, or about $2.9 billion with the benefit of $500 million of expense reductions which are both part of today’s management plan and Skydance’s $2 billion of cumulative cost reductions.”