Paramount (PARA)

Multinational media and entertainment corporation Paramount (NASDAQ:PARA) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 6.4% year on year to $7.19 billion. Its non-GAAP profit of $0.29 per share was 12% above analysts’ consensus estimates.

Company Overview

Owner of Spongebob Squarepants and formerly known as ViacomCBS, Paramount Global (NASDAQ:PARA) is a major media conglomerate offering television, film production, and digital content across various global platforms.

Broadcasting companies have been facing secular headwinds in the form of consumers abandoning traditional television and radio in favor of streaming services. As a result, many broadcasting companies have evolved by forming distribution agreements with major streaming platforms so they can get in on part of the action, but will these subscription revenues be as high quality and high margin as their legacy revenues? Only time will tell which of these broadcasters will survive the sea changes of technological advancement and fragmenting consumer attention.

Competitors in the media and entertainment production industry include Disney (NYSE:DIS), Warner Bros. Discovery (NASDAQ:WBD), and Comcast (NASDAQ:CMCSA).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Paramount’s sales grew at a weak 1.6% compounded annual growth rate over the last five years. This fell short of our benchmarks and is a rough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Paramount’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.3% annually.

We can better understand the company’s revenue dynamics by analyzing its three most important segments: TV Media, Direct-to-Consumer, and Filmed Entertainment, which are 63.1%, 28.4%, and 8.7% of revenue. Over the last two years, Paramount’s Direct-to-Consumer revenue (streaming) averaged 21.9% year-on-year growth while its TV Media (broadcasting) and Filmed Entertainment (movies) revenues averaged 7.6% and 4.3% declines.

This quarter, Paramount’s revenue fell by 6.4% year on year to $7.19 billion but beat Wall Street’s estimates by 1.3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

Paramount’s operating margin has shrunk over the last 12 months and averaged negative 6.7% over the last two years. Unprofitable consumer discretionary companies with falling margins deserve extra scrutiny because they’re spending loads of money to stay relevant, an unsustainable practice.

In Q1, Paramount generated an operating profit margin of 7.6%, up 13.1 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Paramount, its EPS declined by 23.5% annually over the last five years while its revenue grew by 1.6%. This tells us the company became less profitable on a per-share basis as it expanded.

In Q1, Paramount reported EPS at $0.29, down from $0.65 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Paramount’s full-year EPS of $1.21 to grow 23.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Paramount has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.1%, lousy for a consumer discretionary business.

Paramount’s free cash flow clocked in at $123 million in Q1, equivalent to a 1.7% margin. The company’s cash profitability regressed as it was 1 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts’ consensus estimates show they’re expecting Paramount’s free cash flow margin of 1.4% for the last 12 months to remain the same.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Paramount historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Paramount’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Paramount reported $2.67 billion of cash and $15.53 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.82 billion of EBITDA over the last 12 months, we view Paramount’s 4.6× net-debt-to-EBITDA ratio as safe. We also see its $354 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Paramount beat analysts’ EPS expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. On the other hand, its Filmed Entertainment revenue missed. Overall, this print had some key positives. The stock remained flat at $11.70 immediately after reporting.

Updated: May 15, 2025 at 10:45 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Paramount falls short of our quality standards. To begin with, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Paramount’s P/E ratio based on the next 12 months is 7.9x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $12.59 on the company (compared to the current share price of $11.89).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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