Chit Chat Stocks - Paramount Global (PARA) | Not So Deep Dive

Episode Date: March 8, 2022

Paramount Global operates a worldwide media and entertainment business. The company distributes a variety of content across various different platforms. Paramount Global was formerly known as ViacomCBS. The company was founded in 1927 and is headquartered in New York. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Paramount Global. Enjoy the show! This episode is sponsored by Commonstock, a social network for smart money investors. Check-out the platform here: https://commonstock.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Contact us: [e-mail] Timestamps Company Background | (3:26) Industry | (9:07) Management & Ownership | (10:42) Valuation | (13:26) Earnings | (16:43) Balance Sheet | (18:54) Our Analysis | (22:00) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome to Chit Chat Money. Today is our Tuesday not-so-deep-dive episode, and we're talking about Paramount Global, formerly known as ViacomCBS.

Who's choice was this? Ian? I think this was yours, right? Yep, this was my choice. What inspired you to pick Viacom or Paramount? well at the time it had been it had been dropping quite a bit it was right when the name change happened um it's rebounded quite a bit since then but i was a little interested we see our guy alan on twitter it's been uh keeping us up to date on it so i thought it was time for us to take a little not so deep dive episode for it and these episodes i guess for anyone who is new to the show these are 30 to 45 minutes usually around 45 minutes uh breakdowns of the business we go

through what they do how they earn money some of the financials and then we talk about i guess the opportunities and sort of the qualitative characteristics of the investment as well but we are on with brett as well both you guys are in foreign countries right now uh so that's why I'm kind of hosting, not the typical host for these shows. But before we get to Paramount Global, I want to talk about our sponsor. It's Common Stock. So Common Stock is a social investing platform that lets you connect your existing brokerage accounts. So a lot of people are able to, I guess, fudge the numbers with some of their stuff. When they talk about investing, this kind allows you to really show what your gains, they've told us to call it, let your gains speak for

themselves. And I think this really lets you do that. It also gives you sort of a longer form way to talk about potential investments. So you can add sort of attachments, memos. Brett, you're on CommonStock more than I am. Do you want to add anything about the platform? Yeah, I wrote a memo about Match Group and it's a perfect way to do a longer form. it's kind of in between maybe an analyst report and a tweet about a stock. So you can kind of get that conversation going where it's more casual, but you have room to write out your full thoughts. If you've ever heard of something like Value Investors Club, stuff like that, this is for that. But for maybe for the younger type generation, people want to make it more

social. You can connect your brokerage account, all that good stuff. Okay. And you can download it on iOS. I believe they're on Android too, since Brett, you use them. Check them out. We like the team over there. They also hired two of our friends who have been on this show before. So they're really building

quite the great team out there. But yeah, definitely go check it out. I've been kind of looking to get into maybe a place that allows for longer form stuff anyway. So I'm going to try to spend more time on there. Without further ado, I'm going to get into what Paramount Global does.

And I have to say, it was pretty messy looking at it. Like it was kind of hard to understand the strategic vision for the company. But basically, it's now just a hodgepodge of popular media assets that deliver video content across tons of different platforms. So some of the most notable brands include CBS, Paramount, Showtime, BET, Comedy Central, Nickelodeon, MTV, to name a few. And all those brands have their own intellectual property underneath as well. And then a lot of those brands have different parts of the business.

So Paramount's got Paramount Studios, which is sort of the theater business producing movies. And then it's also got Paramount Plus. CBS has a few different channels as well. But each of these brands generates revenue in multiple ways. So there's number one is traditional advertising revenue. Think just ads on cable channels. That's basically that is that comprises the majority of the advertising revenue. The second one is affiliate revenue. So these are fees paid out per subscriber by companies like Comcast or Dish.

So affiliate and advertising are really just, those are tied to their legacy media business. And then the third one is streaming revenue. So each brand we talked about, and this is sort of the future, what a lot of people are thinking about is the future for Paramount. Each brand has their own streaming channel. So where you thought it might've been bundled into one, they all kind of have their own. There's Pluto TV, there's CBS has a streaming channel, Showtime has a streaming channel, Paramount Plus, which is one we're going to talk about. And it varies by model. So some of them

are subscription products, some of them are advertising, some of them are subscription and advertising. And any advertising revenue from streaming gets lumped in here. It doesn't get lumped into advertising as its own. And then the fourth one is theatrical revenue. So this is movie theater revenue. It's a very small part of the business. It's also much lumpier. And then the last one is licensing and other. This is like if Netflix aired The Godfather. So Paramount owns Godfather. If they aired it, Paramount gets that licensing revenue. So, and the history, this is kind of, history took me about an hour to research, which it was very extensive and it's very, also very messy. So, it started in 1927. And I know that sounds like a long time ago.

There was a talent agent named Arthur Judson who was struggling to find any work for his clients. And they were primarily, the clients were trying to get on NBC's radio stations. And so Arthur Jetson decided to build his own network, which he called United Independent Broadcasters. It was later renamed Columbia Broadcasting System, so CBS, after he merged with Columbia Phonograph and Records Company. So that's kind of the basics of CBS. That's kind of how it started. And then it got bought out by a guy named William Paley, who kind of led them into the juggernaut, the media juggernaut that they are today.

And then fast forward to 1952, CBS actually broke out a new segment of its company. It was the broadcast syndication segment, which was basically just designed to license some of their content to other stations. And this later got renamed to Viacom and spun off due to, there was some regulatory rule that said media companies couldn't have syndication companies as well. And so, they spun off Viacom. The segment Viacom itself started to buy up its own media assets after that rule was kind of repealed. And Viacom ended up actually buying CBS back in 1999, only to break up again in 2005. So, divestiture, re-merge, divestiture, and now… Talk about those investment banking fees right there. I mean, if there's any investment bankers listening to this, they're just licking their chops at those 1% fees back and forth. Yeah. And fast forward one more time to 2019, and Viacom and CBS decided they were going to re-merge and rename the company ViacomCBS, only to change it to Paramount Global recently,

so about two years later. So now it's traded under the ticker PARA. it's known as Paramount Global, but they have had, I wonder if this is the last ride. I wonder if they'll divest again at some point. I know they have been divesting some assets, but hopefully this is the final company. What do you guys think? Well, I'd say the most likely scenario might be they get bought out. There's been a lot of rumors of that. So that's probably something we're going to discuss in the second half uh looking at their history and the the way these media companies like to operate i'd say it's likely that there will be some sort of maneuvering

because it seems like that's what they just like to do they never want to sit still but ian you got any thoughts on that yeah i think um i think you're right that they're going to do some maneuvering they've continued to make some divestitures the last couple of years as well um so they're always seeming to kind of add things take things off trying to trying to find the the right mix of parts to be paramount i guess what's now paramount paramount global but i i suspect that this is not the final iteration yeah and i'll hit the industry and competition here again i got a hamster wheel trying to run this wi-fi over here so apologies if it uh bugs out a bit but i think it's fine right now um and i gotta say paramount global the name it reminds me of

Prestige Worldwide from Step Brothers, but kidding, it's a more serious point here. The industry is fairly simple to understand. There's only like three notes that I have here that I think people would want to, or would say would be relevant. So on a broad standpoint, the entertainment industry is estimated to be about $2 trillion worldwide and steadily growing each year. Global broadcasting and cable TV is at about $300 billion as of 2019. And I think either stagnating or slowly dropping. And then the global streaming market is estimated to be $82 billion worldwide in 2022. So this year, and growing quickly, as most listeners would know. Now, competitors, there are a ton. Everyone knows Netflix. There's Fox and Fox Sports,

and then Disney and ESPN. ESPN and Fox Sports are their big sports competitors. Amazon is dipping their toe into sports. They're kind of a competitor there as well. They're also a competitor in streaming apple is a competitor in streaming hulu warner hbo discovery which is they're going to be their own company soon um you count youtube you count video games the list is really endless i mean in a broad sense paramount global is competing for people's attention during their leisure time and that's really you know it's a very it's a hyper competitive industry all right ian do you want to hit management and ownership? Yep. So the CEO, the CEO of Paramount Global is Robert Backish or Bob Backish. He came from the Viacom side and the Viacom CBS

re-merger back in 2019. And he's been the CEO of Paramount Global since then. Paramount has a segment head model. I don't know exactly what the right way to put it is, but basically they have a CEO or a head of operations for like all their different segments. And so, um, for instance, like one of them is a CEO slash president of internationals networks, studios, and streaming. And I find this is kind of a side note, but I always find it interesting with these types of companies and I'm a Disney shareholder. So I see this on the Disney side that it always feels like these are interesting to watch

the leadership teams on because there's a lot of potential candidates for new CEOs. There's kind of some maneuvering that happens. There seems to be a little bit of politics involved about, um, like which segment head is next in line and who's the most important and all that type of stuff. And it was something that I saw at GE as a GE shareholder, you know, four or five years ago. But anyways, on to some more about the management and leadership. Sherry Redstone is the chair of the board. Her family's been involved in the media world for years, most notably her father, who ran National Amusements prior to her, which is kind of this media company, basically.

But it's basically a holding company. and um they national amusements owns 10 of vi or paramount global and holds about 80 of the voting power and so paramount global is controlled by this redstone family and now it's firmly in the hands of sherry redstone because there were some legal battles over the last couple of years about whether she was in control or her father who was very who it was uh in his 90s and his Her father has since passed away. And so it's very clearly in her control now. At one point, CBS shareholders wanted more of a say in the company and didn't want her to have the same, basically all the voting shares. And she won that battle. So she's kind of been able to

capture control of this company and seems to be fairly actively involved. Otherwise, insiders own very little. And then one final note is that Vanguard owns about 10% of the company and is its largest shareholder. it sounds like succession the show yeah it was based off of this stuff it's uh yeah they said i believe it was a combination of redstone family and the murdoch's um but yeah so they're one of the uh they're one of those crazy families it sounds like that succession is is truly based off of i'll hit valuation market cap 23 billion dollars as of this writing ticker as ryan mentioned is P-A-R-A. They also have some other ones that's P-A-R-A-A. I think they have dual class

that is traded. Enterprise value is a lot higher. It's $34 billion. Now enterprise value is market cap plus debt minus cash to exit any of those liabilities. I just thought I'd put that out there because a lot of people may not know what enterprise value is because, and it's very relevant to Paramount Global because they have $17.6 billion in long-term debt and $6.3 billion in cash. So that debt load, while Ian will get into it on the balance sheet, it's very manageable. They spread it out pretty good. It's there and it's big. Now, enterprise value to operating cashflow is around 40. Now, this is probably the best metric I'd say for measuring their profitability, at least in the short run, because they're investing heavily for their streaming

content. It's sort of the Netflix model right now, or as people may have known, Netflix kind of has those accounting things that make their earnings look a little higher than they actually are. And it's a bit confusing to talk about over a podcast, but they, if you have, okay, they amortize their content that they, well, amortize is a word that many people might not know. But basically once you get to the operating cashflow line in the cashflow statement, that basically X's out their amortization while also their upfront investments in content spend. And it kind of gets the true cash generation without any of the accounting gimmicks. Now, right now, since they're investing a little bit heavier and they're kind of coming off of

the COVID stuff and they're in this transitional period, cash flow isn't looking that great, but you're going to want to track that over time because if they generate that operating cash flow, that is what they're going to be able to use to pay down debt and then eventually return cash to shareholders through either buybacks and dividends, and that's how you're going to make your money. Now, one thing I look at is watching out for the inflated enterprise value to income number, especially with one trailing numbers. They had a big real estate sale that will not come through again and was also a non-cash sale at the time. There might be some more details in there you might not want to know. And again, like Netflix, there's a big difference between

what they're saying they're earning on their income statement and the cash they're actually generating right now. So again, track those over time because the cash is king over the long run. Looking at dilution, not really anything to worry about. They had a good amount of RSUs and options that were exercised in 2021 because I think as we all know, not everyone knows this, but they were one of the stocks that the Archegos blow up was about and or was in and their stock got driven up by what, like 300% in a month. and i think some people took advantage of that paramount global took advantage of that and raised some cash and i think people exercise their stock but their granting pace compared to their

shares outstanding is not heavy at all so what that means is that going forward dilution uh of your ownership might not be that hard or might not be that heavy and it won't hamper returns i know that was a mouthful for the valuation um but this company is complicated so ryan do you want to go to go into earnings. Yeah, that was a good explainer. And it's a lot of the stuff ends up showing up in the earnings. So I'll kind of try to avoid some of the accounting minutia. But in total for 2021, they generated $28.6 billion in revenue. That was up 13% from a year ago. Advertising accounts for 32% of revenue. Affiliate revenue accounts for 29%. Licensing, which I believe hopefully everyone remembers what each of these segments consists of,

was 23%. And streaming is about 15%, but it is growing the quickest. So year over year, streaming grew 64%. That was at least the top line. And then as Brett alluded to, they reported $6 billion in operating income or adjusted operating income. I believe that figure was actually pure operating income, but that came from the real estate sale. And so if you're looking at it on a market cap to operating income ratio, it looks insanely cheap, but that is very misleading because it's not indicative of the true cash that us as shareholders are getting. So actual free cashflow was about $500 million. The majority of that discrepancy between operating earnings and cashflow is that content spend, especially for streaming. And they announced

that they're going to spend up to $6 billion in content expenses by 2024. So they really are pouring a lot of money into it. And they also reported some of the other, I guess, highlights from the year. They reported 56 million total streaming subscribers globally. And that's across their entire family of apps. That's more than double what it was last year. So they are seeing a lot of growth, explosive growth in their streaming business. And they upgraded their guidance for 2024. They call it direct to consumer revenue, which is pretty identical to streaming revenue. And that is they estimated that they could generate $6 billion in 2024. Originally, they upped that to $9 billion. So they are seeing a lot of success there. That's pretty much it for

earnings. Ian, do you want to talk about the balance sheet? Yep. I'll get into the balance sheet now. As Brett was mentioning earlier, they have $6.3 billion in cash, were able to raise a little bit when their stock price got a little inflated. They've got $17.6, $17.7 billion in debt with an average interest rate of 4.93%. One thing to note about this is more than half of the debt is due after 2030. With some debt, I think some of the longest dated debt is due in 2047. And so because of their, you know, as one of these big media companies and some, the types of advertising and affiliate revenue that they get, historically, that's been fairly stable. And so they're able to put on quite a bit of debt onto a company like this, and they're able to get really long dated debt. And so that's kind of, they will have to start refinancing some of that debt at different points in time, as long as they kind of maintain the same capital structure.

but a lot of that is due 10 plus years away. They paid down about $2 billion in debt in 2021. And they do mention that they will refinance debt if and when they can get lower interest rates. So they'll take some short-term hit on cash with some, sometimes they have to pay fees to extinguish some debt. But if they can refinance it at a lower interest rate, that's going to be better for the long-term, they're happy to do that. They also have access to a $3.5 billion revolving credit facility. And they haven't used any of that yet. And so that's basically a line of credit that they can use if they decide what needs more cash to spend on content or pay out dividends or buy back stock or whatever they decide they wanted to invest in the business. There's also a pending

$2.1 billion sale of book publishers Simon & Schuster, which was owned by Paramount Global, to Penguin Books. It's currently in the midst of like an antitrust lawsuit. And so there's some questions about whether that sale will go through, but that should provide even more cash for the company. And then this was just kind of something funny that I found earlier. I was comparing Paramount Global to Netflix and Disney and some other companies. And it's eerily similar the capital structure of Paramount Global and Netflix. And they're different companies, So it's not identical. And there's some there are some differences, but they've got both companies have about six billion dollars in cash. Both companies have about seventeen point seven billion in debt with similar interest rates.

Paramount Global has longer dated debt. But I just I found it interesting that two two companies with similar business models, but still still different because of all of Paramount Global's legacy businesses have. Like I said, it was it was stunning to me how similar their cash and debt numbers were. Yeah, and the balance sheet today is in much better shape than it was at the time of the merger. It's really remarkable how much they've been able to deleverage over the last year or so. Thank you, Bill Wang. Thank you, or however you say his name. Yeah, yeah.

That's what they're going to be saying. Yeah. Let's hit an ad break, though. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link.

And now all your computer can play is... Red color, red color, where are you? All blocked thanks to Advanced Security, included with Cox Panoramic Wi-Fi. Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Welcome back in. We have anecdotal evidence next. and i think we all probably have something but let's start with ian what do you have

i haven't used the streaming service um paramount plus but i've you know obviously watched cbs shows or football or that type of stuff um but honestly i almost got it and i think this is just the state of streaming today but i almost got paramount plus confused with um peacock and i thought i was like oh i'd watch something on there and then i realized it was actually peacock that i've been watching it on and not paramount plus so um maybe a little bit of a like i said a little commentary on the state of streaming today yeah for me i i've watched paramount plus only because they have like certain soccer rights that i like to watch um but i churn or i unsubscribe after i lose those um some of the other ones like i've watched billions on showtime but once again it

wasn't something that i kept subscribing to i subscribed to it just so i could binge it and then i was kind of done uh there really isn't any service in here any streaming service in here that i would subscribe to recurringly at the moment for like for like a whole year it would kind of be spotty based on when i wanted to watch certain content brett what about you yeah i think i can play off of both of you guys there um i agree with ian that i do not understand why like the value proposition for paramount plus is a bit muddied i don't know why i would want to subscribe to them like i understand why i'd want to subscribe to netflix i know it's broad-based tons of stuff i understand why i would want to subscribe to disney plus if i was a family or a fan of the

fantasy content i understand espn plus i understand hbo max but i don't understand paramount plus now speaking about the churn stuff and that's a big problem they have um way higher churn than netflix i think the they're they're combining or they're allowing people to uh subscribe to both paramount plus and showtime at the same time or sorry under the same subscription i think that is a big you know that'll be a big uh help with churn because each on its own it doesn't make sense why they're separate but combining the two i think that it's almost to an hbo level plus sports uh value proposition um but separately i just really like it irks me to have to subscribe to like paramount plus um which i've never have and i always do an illegal stream um don't don't call don't call the

police on me but i really just do not like when they have the sports rights in paramount plus um i know it's they they own the sports rights and they have the right to charge me for it but i just don't like it i would rather have i i enjoy immensely when amazon has the rights to thursday night football and when espn has all the football stuff because they will let you one the streams are a lot cleaner and two it it's just such a better experience of signing up or having a shared account with other people, or, you know, there's so much like, I don't know, Paramount Plus just has a bad UI. So personally, I really don't like it, but I kind of understand where they're going from with all their content and trying to bundle it. Does that, does that

make sense, guys? I think you guys are in the same boat, maybe. I mean, it's not the, it's hard to tell exactly what they're going for because there's overlapping content in some of their offerings, but it's still each brand has its own direct streaming offering. That's why I say it's basically like a hodgepodge and sort of like a mixed pot of assets. It's not clear where they're trying to go with this, but let's get to future growth opportunities. Ian, what do you have? Yeah, I think something that's going to be important for them, and this is kind of piggybacks on that real well but they need to get their big titles from traditional to streaming so they'll tell stuff they'll say stuff right now about how important streaming is and streaming is the future

of the business and we're focused so much on streaming and then their next paragraph their next the next line out of their mouth will be um you know our biggest shows are young sheldon yellowstone ncis which are all shows that are on their traditional um channels on uh cable television and so and they don't have the streaming rights to those so for instance um young sheldon's on hbo yellowstone's on peacock ncis is on netflix and it's just this kind of weird thing and part of that's because they just came out with paramount global and so these these they were getting the um the rights to them for a couple of years they were giving the right the streaming rights away because they didn't have their own streaming platform to monetize but um eventually they're

going to need to start getting some better content on there like it'd be nice if they were talking about their biggest shows being things that were on the streaming platform um and and having more success in that realm if that's the direction that they really are trying to push the business um some go ahead go ahead yeah i wonder how much conflict or i guess friction there is in trying to get those rights away from linear uh channels because i and i've heard that before is like some of these studios aren't super like it isn't as easy as it sounds as like oh well it's technically our owned asset but obviously they can't get it on their streaming channel so there seems to be more friction there than i

would have thought right and some of it makes sense because they were trying to they were trying to make as much money as they could before they had their streaming platform and so they might as well license it out but i think just to contrast disney did a really good job about and now disney has more control over all their content but disney had did a better job of kind of setting it up so that they could start pulling things off and looking forward and saying we want these licensing deals to end so that we can transition this stuff to our platform once we launch our platform and it doesn't seem like paramount plus has done that in the same way i will say that they have been working with the Yellowstone creator on a new series. They seem to be trying to make efforts

to get higher quality content on Paramount Plus. And I think that's a move in the right direction. And I just, there's kind of an imbalance right now. And I think the growth opportunity is, can we get the things that are most popular on what we think is the best business opportunity, which is the streaming platform? I would note on the end, you said Paramount Global, and i think you meant to say paramount plus correct just for any confusion from listeners because i know every all the names are um they can be quite confusing at first yes that's correct all right for me and i think this taylor's or is almost just piggybacking right off what ian said it's it's it's really not one i guess direction but paramount plus seems to be what they're kind

of betting or putting most of their marbles in. It doesn't seem like, I mean, that's really, I imagine what a lot of the content spend is going towards. Over the last year, or this year, they accounted for 33 million subscribers. That's almost triple its figure from a year ago, although it launched, I want to say a year ago. So maybe that's just early growth. That seems to be where they're kind of betting the heaviest.

And now that I'm just kind of thinking about this is because in my mind, it's like I'm frustrated because I don't know how profitable a lot of these streaming businesses are for them. And they're obviously kind of in cash burn mode right now because they're pouring money into the content spending. But it's almost like they have to because if they don't, they'll be left behind on linear TV. So it's not necessarily, I mean, at least they have the balance sheet to do it, but it almost is like they're in a corner. this is their only option this their only way out and they have to move to streaming it just doesn't i don't know i mean it's not necessarily a bad thing but brett what's your future growth opportunity yeah i would note that paramount plus was called cbs all access again it's so confusing they keep renaming stuff which is just annoying um but it is what it is so they i think

that 33 million was off of a base started a little while than more of a year ago but for my future growth opportunity, we haven't talked Pluto TV at all. And that's probably because we had nothing to complain about. And it's maybe, I don't know what your guys' opinion are, but I think it's probably the highlight of this business. It seems to have found its niche. It's free and ad supported. So anyone can really go on and watch stuff. You just got to make an account. And I think it can probably grow globally. The only concern here, and I don't had the MAU numbers in front, but they had pretty good MAUs, pretty good growth and pretty good hours watched. I don't, I think YouTube and Roku channel may have a competitive advantage here

though. What gives them any sort of differentiation with Pluto TV? And is that defensible over the long-term? Curious what you guys' thoughts are there. Do you mean YouTube or YouTube TV? YouTube itself, like anything YouTube, you know, I mean, YouTube on its own is ad supported free. i think that competes probably it's probably the number one competitor for pluto pluto tv to me because like if i'm spending 30 minutes watching something on youtube that's something i could be watching on pluto tv but isn't isn't pluto tv primarily live channels or am i getting that wrong uh i think it's not like similar i thought they had live channels versus i would say don't get don't get held up on the mode it's just who's it's all about hours spent you know what i mean

like it doesn't matter what type of mode it is and and they say they say they've got 250 plus channels of free tv and thousands of on-demand movies and tv shows okay i think it's different content obviously it's growing so i think they're i think they can it doesn't have to be one or the i think they can both do well youtube's obviously doing well pluto tv is doing well what about roku though i think roku channel i mean that's basically the same thing does it have a live does it have all these live channels i'm looking through i believe so i believe roku channel is very i haven't checked on roku channel but it is very similar to pluto tv i don't know who would win there maybe it's another one of those where both both can win no or do you think it's kind

more winner take all i was just gonna say uh um yeah i wasn't i had nothing to say so i think uh hard to tell i don't have an opinion all right highlights and lowlights for the business and yeah i think to start off i think the paramount global name change was smart they've talked a little bit about how viacom cbs felt like two companies still and it just wasn't good and like through our researching for this show and as we've discussed like there's a lot of pieces of this business that feel kind of um siloed and i think they're trying to get away from that both with and it starts from the top with the name i think and so i think that was a good move i think the paramount name is probably better for what they're trying to do um

and focus on streaming rather than using uh the viacom cbs which just sounds like an old company right when you hear viacom cbs it just sounds um it sounds kind of old i don't know like not that that's necessarily a bad thing but i think they're trying to get a little bit newer um i do think to kind of piggyback on the last conversation you guys are having i think there is a place for ad supported streaming and i don't think it's um been saturated yet we've got all this ad supported tv through um linear tv and people are used to that and there's a huge market for ad-supported television and ad-supported television shows and movies and all sorts of stuff. And I think the Pluto TV business is a good one, as you were saying, Brett. And I think

there's some interesting opportunities there. I think there's more open space in the ad-supported streaming market than there is in more of the subscription model like Netflix and some of these other ones. A couple of lowlights for me is the voting control with 80% of the shares being owned by that family i think that's um you're along for the ride with what they want to do right and what um at this point what sherry redstone wants to do and i think there's a lot of people who really like what she's doing and thinks she has a good direction for the business so this isn't a knock on her but the businesses have not performed great over the last few years and shareholders don't have a whole lot of recourse and so it's just something to be aware of

Um, the capital structure is a little bit interesting to me. Like the debt, like I said, is, uh, understandable, but at the same time, um, they're paying out a dividend, um, every year. And so they're paying out, uh, I've got this number here, $600 million cashflow, right? They're paying out $600 million in a dividend, um, for the last couple of years and, and basically planning to pay out over $600 million in dividends this year again. And it just feels weird. And part of the thing, like I mentioned at the top, Vanguard is one of their largest shareholders with 10%. And I assume that they like the dividend. And I assume there's a number of institutional investors who like the dividend. But it feels like if you're really trying to

chase after streaming, and you're trying to preserve as much cash to spend on content, paying out a dividend at this point um is not the best decision now maybe like i said maybe their hands are tied and they're just they have to pay a dividend because everybody expects it and they're afraid to cut it because it's going to tank the stock price but um it just seems like that's not a great decision um and then even like and part of this was due to covid but even disney has suspended its dividend since 2020 um and so that cash you know 600 million dollars into this business is quite a bit of cash that could be used to hopefully fund some growth. And it makes me wonder if the management team doesn't think they have great profitable growth ahead of them

and that they can put $600 million to work. Like it just, it kind of, it raises a couple of yellow flags. Yeah. My highlights were basically that they were able to share up the balance sheet. And I guess maybe I'll talk about the Archegos or Bill Huang, or I'm sorry if I'm saying it wrong, but Bill Huang, Bill Huang incident, which was essentially a stock. If you look at the stock chart, it reached like, what was it? Like a hundred dollars a share or something like that. Basically because it was being, and correct, if I'm getting any of this wrong, Brett, let me know. But basically there was a bunch of leverage that was sort of artificially pushing it up and Archegos, the firm that Bill Huang ran, essentially got a margin call and all

these banks had to liquidate, driving it right back down. In that timeframe, ViacomCBS or now Paramount Global was able to raise cash, I believe around $3 billion at $85 a share. Today, it's at $30 something a share. So really opportunistic cash raise there. Also, I think the divestiture of Simon & Schuster could potentially free up another $2 billion in cash. So the balance sheet is in great shape. And on top of that, with the push towards streaming, it's not like they're starting from square one. It's not like they have $6 billion in cash and no content. So they do have a library of content that they could potentially pull from, like Ian talked about earlier, that could really, I guess, bolster the offering for a lot of their streaming apps.

My lowlights though, I actually don't know what the economics or the profitability is going to look like for Paramount Plus or any of their big streaming apps. I have a hard time. if i don't know what that's going to look like and the legacy part of the business is going to keep running off i have a hard time buying into this um and i'll leave it at that brett what do you have for highlights lowlights yeah i like pluto tv even though i was trying to play devil's advocate but i i do like it it seems like they've executed really well i don't know it that i don't know the business that well but i mean the numbers look good um their debt structure looks good like ian was saying uh great long-dated stuff there i was worried at first looking at that 17 billion

dollar number but looking at the at their kind of um payback periods of what years it's going to be it's not that concerning at all if they can execute on their strategy they have a solid backlog like ryan was just saying um and then the move to bundle paramount plus and showtime i think shows they're moving in a direction that's going to work however turn to low lights their overall streaming strategy i think is poor um i don't know why it's on it's multiple companies like it still feels like multiple companies i just don't know why like disney um is so much cleaner you know what you're getting and eventually everything's going to move on to disney plus hulu um and those might even merge together and espn plus like what even is this netflix is one

big bundle hbo max is um basically everything under one it's like it's like separating hbo max into two with paramount plus sometimes i just don't understand it but they're moving in the right direction so hopefully they could fix that but again if they go with this current strategy i just think they're going to lose um lackluster growth i think with paramount plus compared to the opportunity in front of them now some people might say you know it is growing but i just don't think it's the growth isn't strong enough and the churn is quite high i just funny enough saw a chart on twitter the other day right before we recorded this uh showing that paramount plus its churn has been consistently high consistently higher than netflix and you got to do something

to fix that and they're really not um and again biggest low light very tough competitive position that they find themselves in then netflix is larger amazon is larger um hbo max discovery is larger who am i missing did i say disney i mean yeah they're way larger they're spending way more their content spend for param paramount global's content spend is is way less um that's just a big overhang for me all right ryan or i guess you're leading the show we move to bull case yeah and what's your bull case so david gardner from the mommy pool has this idea of the snap test where it says if i snapped and um paramount global suddenly disappeared tomorrow would anybody notice and would anybody care and i think that's how i'm going to kind of look at

the bull case bear case today i think on the bull case i think there are a lot of people that care about many of their shows especially on linear television when you talk about young sheldon Yellowstone, NCIS, Paw Patrol. And I've mentioned Paw Patrol being a really good. Don't sleep on Paw Patrol. Don't sleep on that. It's actually super popular. It's like the new Yeah. And probably a little more uplifting than SpongeBob. But anyways, I think these are franchises that they can leverage over the years, grow the brand. I think some of their hits for this to be a bull case. I think some of the hits that they have on linear television eventually get onto their streaming platforms and subscriber growth continues.

And that's, and it becomes one of the major streaming players that withstands this next couple of years of turmoil. Yeah, I guess I hadn't really, I think maybe I was anchoring too much to like what the content meant to me. Cause some of these, some of these shows really do resonate with, I mean, they obviously resonate with a huge audience. For me, just looking at the bull case, I think a lot of people,

pretty much all investors that look at this are going to have a hard time valuing it because it's not super clear what's going on. And you see that looking at analyst ratings, I think it's like six think it's a sell, six think it's a buy, and the price targets are vastly different. And so I think that creates some opportunity if the non-streaming segments of their business can keep sort of melting at a slow rate or even stay flat, and they're able to hit their guidance for direct consumer revenue for 2024. I think this is, I think there's a very good path to having this investment work out. I think this is probably a business that trades at an EV enterprise value to free cashflow multiple of probably 10 to maybe 15 times. And so I think

if all, if they hit all their targets, we're probably looking at a good four or 5 billion and free cashflow maybe in five years. Brett, what about you? Yeah, my bull case is, you know, legacy content, sports, cable shows, they're stable, streaming hits maturity in four to five years, you know, continues on its current growth rate.

And then I separated out Pluto TV and I'd say Pluto TV continues to be a double digit revenue grower and kind of, well, I put wins here, but is one of the leaders, I guess, you know, there's plenty of ad supported out there, is one of the leaders in the ad-supported streaming market. I think if this happens, you could see them doing levered

free cash flow of $3 billion to $4 billion a year. And I say the levered free cash flow because that takes into account... So normal free cash flow is just typically cash you earn after your capital expenditures. But with the heavily indebted company like this, I would use levered free cash flow because they're going to have continuous... Well, interest payments are in the income statement, but they're going to have to pay back the debt. So after the debt they pay back each year, how much cash can they return to shareholders? I think they can get to about $3 to $4 billion a year if all those work out. It doesn't seem crazy enticing with an enterprise value of $34 billion, but I think returns would probably be positive. And then also in the short

term, I think there's pretty decent buyout potential from Warner Discovery. What about Bearcats in? Yeah, so the flip side of the snap test here, I think that there's a chance that people actually don't care about Paramount Global. And not that they don't care about the shows, but I think it's an interesting thing that people probably don't care about the company. And so they want to care where the content was, they would just go follow whatever piece of content that they wanted, which I think is different than some of the other companies. I don't think Paramount Global has any loyalty with the brand. And it's like a new brand in a lot of ways. um, just to kind of contrast it, Netflix is a necessary expense in today's society. Everyone

has a certain level of loyalty to Netflix because it's where you watch streaming. It was the first streamer people just go there. Right. And then like Disney is a beloved brand and everybody loves Disney for all these, or not everybody, but lots of people love Disney for all these different reasons or love star Wars or love all this other type of stuff. And it's not necessarily even about the particular shows it's about the brand itself. And I think that's what Paramount Global is currently missing. And I think that's the bear case that there's just not enough people care. And as has been your experience, Ryan, that there's a lot of churn in the next couple of years. Yeah. As much as I do think they have

some really valuable assets in their library, I think as an investor today, you are betting on them being able, with how much they're spending, you're betting on them being able to make good content in the future not not just their current library because they're spending that money they have to get a return on that um at some point and so i guess my bear case is that they turn stays high and that they're not able to get a huge return on that um and that maybe you're getting sort of just kind of maybe the linear customers move over but you're not attracting new ones like is that a really good scenario as an investor i don't know brett what about you yeah mine's simple the competitors win um they expect to spend they being paramount global

expect to spend six billion dollars in d2c content in 2024 that feels really low to me um i don't know that's it i think it's simple and if you don't get to scale they're not going to to be profitable maybe if they're able to if they were more direct about they're they're not very direct about the streaming business so if they were very direct about the economics of it the profitability and the growth purely in streaming and where like their direction on a cash flow basis for that maybe analyst analysts would be able to do some of the parts here and value each business independently but they yeah they're just giving us revenue they're just giving us revenue right that's it yeah you can kind of guess but it makes it very hard to predict and maybe maybe

that's an opportunity for investors uh more or less interested in i i haven't known what i was going to say i'll show for for this i think um i think i'm going to have to say just a little less interested and part of that was because i had fairly high expectations going in that this was going to be something that i was um interested in i'm a big fan of disney and i i like the transition that it's made to streaming and well maintain its other businesses but um i think there's just been a couple of things about paramount global i try and stay away from companies that are clearly not the top tier um just because of all the the risk involved with with execution and being being kind of a bottom tier company or not bottom tier but a lower tier

company than some other ones but i don't know there's good there's good things about it there's bad things about it. And I'm sure you guys feel a similar way, but, um, I'm, I have to say just a little less interested, but I'm probably going to do some more research on it anyways. Yeah. It's I'm, I'm kind of the same boat as you. I'm, I'm on the fence. I'm glad I studied the business in case we start to see like some improvements in the information they're giving investors or the direction of the streaming business. Like there's more clarity around that, um that part i'm i would be more interested if those two things happen um but for now i have a hard time predicting what's going to happen and whether these streaming apps are going to land

and be sort of one of the core three or four apps that people subscribe to um that's my only hesitation here and really going through this whole thing all i was thinking was like why not on roku like it seems like everyone is just spending at will for the streaming platforms like it this this whole show got me bullish on like the the platform providers yeah that's a good point um i'm less interested i'm i'm i'm well i don't know if this is the right way to say it i'm more in the less interested spectrum than you guys i don't like the video entertainment industry i had personally have no read on anything except for the fact that probably netflix is going to stay relevant within streaming but i i still don't have any kind of read on what kind of

profitability they're going to have um and within streaming i i don't know this is not nearly my favorite company uh within it even after looking at them so yeah just less interested i mean there's a chance like like you could envision something working out here but i think you can envision that with a lot of companies so like i don't know why are you betting on why are you betting on perma global here with their history of poor capital allocation decisions i it just doesn't it doesn't uh doesn't get the juices flowing i guess as you might say if i were an investment banker though i would love this company oh yeah you guys need a divestiture ah right here oh my god it's like uh michael scott from that famous episode snip snap snap snap snap

what's the stock for next week yeah it's gonna be my turn but we did forget ian has some news for us and you want to talk right 20 30 seconds here yeah for sure so some if you've if you've been listening to the podcast for a while, you've probably heard me mention the project I'm working on. We're finally ready to release that. So it's actually going to be released when this episode is when this episode goes out. So we have created, or sorry, I have created with a partner of mine, an app called Merlin, M E R L Y N that's Merlin with a Y to help

basically help people find the answers to the questions that they need from people that they admire, respect, or trust. And so we allow, um, experts, creators, and influencers to hold build by the minute video calls for, for anyone who wants to ask them a question about what they're doing or, um, just get to get some answers. And so we're getting it out there. We're kind of testing it out, seeing what people think, and we'd really appreciate your feedback.

So if you give it a download, um, and let us know what you think, it's an iOS app for iPhones, um, that we'd really appreciate it. you can follow us on Twitter or Instagram at get underscore Merlin. That's Merlin with a Y and, um, you can reach out to me on Twitter. I'd be happy to walk you through some stuff or, you know, if you're any feedback you have for us. So appreciate the time today, guys. And I am, uh, Brett and I are both on there. So if you want to give us a call, just, uh, yeah, we'll test, we'll test things out. We're, uh,

what do you call them? The first users. I don't know. there's some slang term for that but yeah let's get let's get on to the end of the show um i don't know we i may disappoint you guys here because we're going into the high tech realm i'm choosing applied materials it might be kind of a tough homework assignment for everyone because it's such a complicated business but i believe it's the leading semiconductor equipment company and um and it'll be quite fun to do so yeah all right well that's gonna do it thank you all for listening. Feel free to give us a review. We're almost to 100 reviews on Spotify. So if you want to be the hundredth, actually don't try to be the hundredth. We're at 95 right now. So get those in.

But yeah, we want to remind our listeners that we are not financial advisors. Anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions and securities discussed in this podcast. Thank you all for listening. We'll see you next time. We'll be right back.