Paramount’s Q3 Ad Revenue Decline Provides an Ominous Omen for 2023; Lowering FVE to $45

Paramount reported mixed third-quarter results, but underlying ad revenue weakness does not bode well for the near future. Total ad revenue fell 2% as expected declines at the traditional linear business overwhelmed surprisingly anemic growth at the direct-to-consumer, or DTC, segment. Even with the growth in affiliate and subscription fees, advertising still represented roughly 37% of revenue over the last 12 months. For 2023, we expect that a continued advertising slowdown along with cord-cutting, currency headwinds, and the loss of political ad revenue will drag down ad revenue at both the linear and DTC segments. We still project low-single-digit top-line growth over the near term, driven mostly by the expansion of the firm’s DTC segment which will continue to burn cash through 2025. We are lowering our fair value estimate to $45 from $58 to account for lower ad and subscription growth along with a slower path to DTC breakeven margins.