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Introduction

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On Sunday, I had the privilege of seeing Top Gun: Maverick in IMAX. The movie was incredible and all of the rave reviews are warranted. 

For the packed theater and patrons worldwide, there are likely countless highlights of the film likely relating to Tom Cruise, nostalgia, or the adrenaline pumping flying scenes. 

But I can guarantee you, I was the only one in that theater whose highlight was the opening intro/title of stars soaring over a river before landing on top of a mountain.  

That was breathtaking. 

I also want to give a quick shoutout to my (amazing) mother who made sure to remind me there would be a movie after the Paramount logo flashed on the screen. You are the real MVP. 

Without further ado, 

Showtime.

First Quarter

	Q1 2022	Q1 2021	YoY Change
Revenue	7.328B	7.412B	(1%)
TV Media	$5.6445B	$5.993B	(6%)
DTC	$1.089B	$598M	82%
Filmed Entertainment	$624M	$860M	(27%)
EPS	$0.58	$1.42	(59%)

Looking at the numbers, you would think Paramount had a rough quarter: declines in overall Revenue, TV Media, and a significant decline in Filmed Entertainment & EPS YoY. 

Yes. There was great DTC growth, but we all know how expensive that is. 

Well, the chart above does not tell the full story whatsoever. 

First, looking at overall Revenue, and TV Media, in 2021, CBS had the Super Bowl and in 2022 CBS did not. 

Excluding the impact of the Super Bowl, Paramount company wide revenue grew 5% YoY displaying the strength of the core business. How about that? 

Even with cord cutting and all of the narratives that go along with it, the company is growing its legacy revenues. 

Cord cutting is most definitely real, exemplified by the near 30M decrease in PayTV subs in the US alone down to 68.5M in 2022 (Statista). However, there are 3 other factors that are also real, under discussed, and give me hope: 

1. Rise of vMPVDs – where there are now 14.2M according to MoffettNathanson

2. IP Leverage – the negotiating power and increasing of prices that comes with owning killer IP, specifically exclusive NFL (AFC) rights.  

3. Focus on Profitability – company moving away from high budget scripted dramas on linear to lower budget reality. 

I continue to expect that these 3 factors will keep legacy revenue profitable and stable for long periods of time. Before this revenue disappears, it needs to start shrinking. For that to happen, I am pretty sure it needs to stop growing first…  which is still happening. 

Side note: Just think about how much Private Equity would be willing to pay to manage these cash flowing cows? 

The numbers in Filmed Entertainment also do not tell the full story. There were two significant, one off licensing deals in the quarter with Coming To America 2, sold to Amazon for $125M, and Without Remorse, also sold to Amazon. 

Outside of the licensing deals, the box office crushed it with four #1 box office hits: 

1. The Lost City 
2. Scream
3. Jackass Forever
4. Sonic The Hedgehog 2

The momentum in streaming is obvious with 82% growth. Streaming is directly impacting the bottom line and the significant cause of the EPS decrease. 

I continue to support the active cannibalization of Free Cash Flow to fuel streaming. Why? More on this in a little bit.

Warren Buffett

When I heard the news that Berkshire Hathaway bought more than 10% of Paramount, I almost passed out. 

Like so many, The Oracle of Omaha is one of my biggest investment role models, and his endorsement, for a stock I am incredibly passionate about, to say the least, was too cool. 

Thinking back, I basically had the same reaction to the Buffett investment as to when Lebron announced he was coming home in the summer of 2014. Which as a born and bred, multi-generational Clevelander was one of the coolest things ever. 

Now with some time and perspective on our side, I would be lying if I said there wasn’t a part of me that was concerned that Buffett could be looking for some type of merger arbitrage and he is in the company for the wrong reasons. 

What also did not help my confidence in the Buffett investment was this excerpt from a New York Times article on Paramount a few days ago: 

Berkshire Hathaway did not explain its rationale for investing in Paramount, and the company declined to grant an interview to The Times. But the news caused Paramount’s shares to spike 15 percent.

Ms. Redstone said Berkshire Hathaway’s investment in Paramount took her by surprise. She got the news hours after it had become public.

“I was out to dinner and the person said to me, ‘What do you think of Buffett’s investment?’” Ms. Redstone said. “And I was like, ‘What?’”

If I was a betting man, I would say that this is a true investment and not an arbitrage play as very similar investors to Berkshire like Gabelli and Ariel Fund are vocal bulls of the company. 

We shall see. 

Stepping Back & Streaming

I 100% support Paramount’s decision to actively cannibalize Free Cash Flow to grow streaming. Management has discussed that streaming will be a net-add for the company and the stats are supporting it. 

Last week, I went back and looked at my first purchase of ViacomCBS stock. It was 11 days after the company’s Q1 2020 earnings (May 2020) – almost exactly 2 years ago. 

In the press release, the company shared that they had:

• 13.5M Domestic Streaming Subscribers
• 24M PlutoTV Subscribers 

2 years later, the company has: 

• 62M Global Streaming Subscribers (4.5x)
• 68M PlutoTV Subscribers (2.5x)

When you step back and think about it, this growth is just remarkable. I do not think there is one person @ Paramount that could have even dreamed of streaming growth like this. 

Specifically, two years later, two things are crystal clear:

• PlutoTV is a “big league” asset with multi-billion dollar revenue potential 
• Naming the SVOD service Paramount+ was a breathtakingly good move

Regarding the latter point, it was clear to me that P+ was special the first two quarters after the service debuted. 

The company added 12M Global Streaming Subs in the first two quarters after launch – a majority of which were P+ subscribers. 

The key exclusive originals on the service was the iCarly reboot, Infinite movie, and new SpongeBob content – and the service was still exploding proving the power of the Paramount brand, the love that consumers have to brands like CBS, Nickelodeon, and the overall Paramount library. 

The power of live sports and breaking news was also a differentiated and significant value proposition to the consumer as it was able to overcome, in my opinion, the then hill of entertainment. 

As the content engine in the Fall of ‘21 started kicking in with the likes of 1883 and Mayor of Kingstown, I knew we were off to the races. 

For me personally, I will not be putting much emphasis on the next couple of quarters of subscriber growth, specifically domestically. This is a long term investment for me, and I have my eyes on Q4 2022 where I think Paramount+ has the chance to become a household service. 

The NFL is a massive sub driver for P+  and there will be a mountain of entertainment ready to meet the consumer. On top of the deep deep library of now Paramount wide content and Paramount+ exclusives, in Q4 we will see 1932 – the second installment of the Yellowstone prequel starring Harrison Ford and Hellen Mirren, Tulsa King starring Sylvester Styllone, Top Gun 2 hitting the service, and a whole lot more. 

Man, I can’t wait for the fall. 

In the mean time, what I will be watching is the overseas expansion. I discussed in my last piece just how strong Paramount+ internationally is – the same content offering stateside but also including Showtime hits, South Park, and Yellowstone.  

I could keep writing more and more about P+, but I do have a day job and want to touch on Top Gun: Maverick before wrapping things up. 

Top Gun: Maverick

Millions and millions of people worldwide will be going to the theaters to see TopGun: Maverick and will be blown away. Whether they realize it or not, they will be seeing the Paramount logo flash across the screen before the film. 

I do not think it can be underestimated the impact that this will have on the company’s long term fortunes in streaming and brand affiliation between Paramount and Paramount+. The human psyche is a funny little thing, and I feel that something like this really matters. 

Also, we should be asking the question – Should there be a TopGun 3? A Paramount+ spinoff? Or just leave the franchise as is. 

I think we will see more TopGun. We have too. Audiences just absolutely love it and yes the $$$ generated carries just a little influence in the decision too. 

The key is obviously not to dilute the franchise. In my eyes, I would do a TopGun 3 a few years down the road while also looking to create a high budget, 8 episode Paramount+ spinoff starring and surrounding Miles Teller and his early years in the military. 

Who cares what I think. Check out what TopGun director David Ellison told Lucas Shaw of Bloomberg:

Shaw: Is the door open for another “Top Gun” movie?

Ellison: That is always up to the audience.

And the audience has decided.  

Finally, I wanted to touch on the fast follow model and how it is a serious ace in the whole for $PARA streaming. 

The 4 #1 box office hits  I mentioned earlier: The Lost City, Scream, Sonic, and Jackass Forever are all now on Paramount+. Powerful. Additionally, Sonic The Hedgehog 2 racing to P+ likely was a big part of why the service found themselves at #2 on the App Store in the Entertainment section, over the weekend. 

Specifically, from the previews, The Lost City gave me some serious Netflix vibes – big name actors, big budget, and likely a pretty predictable plot. For many, likely a movie they would stream but not go to the theaters for – even though it broke $100M in the box office. 

The title also got significant engagement on P+ per Samba TV who shared that the film was watched by over 1.5M households in the first 14 days on the service. 

Why is this model so powerful compared to Netflix? Because, the company just has so many more ways to distribute costs, generate revenue, and engage with the consumer.

Wrapping It Up

This is an incredibly exciting time for Paramount Global, and I am most definitely enjoying the journey. Management is executing beautifully and in many ways is leading many of the trends in streaming including: 

1. FAST
2. Fast Follow Model & value of theatrical 
3. Hard Bundling oversees
4. Power of subscription + advertising

Bob Bakish does not get enough credit for identifying these trends early and aggressively pursuing them while others may not be. Ultimately, the great execution needs to translate to the bottom line for Bakish and co. to get the recognition and stock appreciation that they deserve.

I want to leave you with an excerpt from Matthew Goode’s monologue from “The Offer,” the story behind the making of The Godfather.

Goode plays Robert Evans, the then head of Paramount Pictures, who uninvitingly bursts into a Gulf and Western board meeting (then owners of Paramount Pictures at the time), urging them not to sell the asset. 

“Right now the soul of America is broken… we are hurting. People don’t trust politics and big business. What can people look up to? I will tell you. Paramount. Take a look at the logo. We are the mountain top. We are the god damn statue of liberty… You are tired, you are poor, huddled masses yearning to breathe free, we will give you two hours of respite from the harsh realities of this world. Complete with popcorn, and coca cola and we will do what other people can’t – we will entertain them. We will give them an escape, we will feed their souls until they are fit to burst. That is something that you can’t quantify by checking the stock on the daily ticker.” 

Until next time, 

Alan

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Disclaimer: This analysis is for educational and entertainment purposes solely and is not professional investment advice. The author of this piece is Long Paramount Global stock.