Downside risks to our target price include:
1. Paramount has a fair amount of exposure to the advertising market, which has proven to be highly cyclical (e.g., 2008–09). Many of PARA's key ad platforms are mature, and, if the ad market performs worse than expected, they could face greater pressure than the overall ad market. Furthermore, the ad business tends to have high operating leverage. To the extent we see softer trends than we have anticipated, we could see downside to our estimates.
2. Ratings could deteriorate more than expected across the firm's broadcast and cable network portfolio. If this occurs, Paramount could see smaller-than-expected top- and bottom-line growth. This could prompt the stock to underperform relative to our target price.
3. There is execution risk associated with the company’s digital pivot. There is downside risk if the company is unable to grow its subscriber base effectively.
Upside risks to our target price include:
1. If the firm’s DTC business can scale faster than we anticipate or reach full-year profitability ahead of expectations, there may be upside to our estimates and target price.
2. If the Skydance merger closes and the pro forma entity realizes more synergies than we expect, there may be upside to our estimate and target price.
3. To the extent the firm completes additional asset sales at favorable valuations, there may be upside to our target price.
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