Why Warren Buffett bought Paramount, not Netflix, stock

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Older viewers love CBS, but I guess Warren Buffett didn’t drop $ 2.6 billion in network parent shares

Paramount Global

Because he is a big fan NCIS: Hawaii. He may be betting that investors got the show business all wrong.

Legacy looks more like an asset than a drag on television and movie distribution streaming. It says that famous price investors did not go for shares

Netflix

(Ticker: NFLX), which dropped from a high of $ 700 last November to $ 190 by the end of Tuesday.

Paramount (PARA) has merged two legacy television companies: Viacom and CBS, both of which were cash cows. When Bob Bakish took over Viacom in 2016, TV ratings were poor and the company’s multi-storey movie studio, Paramount, was losing money. But Viacom earned $ 1.2 billion in free cash on its 12.5 billion revenue in its most recent fiscal year. Bakish has boosted TV ratings, turned movies into profitability and increased free cash flow.

CBS, meanwhile, was then and is now a perennial rating leader. In 2016, it generated about $ 1.5 billion in free cash over $ 13.2 billion in revenue. The two companies merged in 2019, taking Bakish as head and launched Paramount + streaming service last year. The company owns a showtime premium channel and streaming service and a free streaming service with ads called Pluto TV.

It’s too early to call Paramount a success. For one thing, the stock has stunk. Even after it bounced 15% on Tuesday following Buffett

Berkshire Hathaway

(BRK.A, BRK.B) released a share, shareholders have lost 27% in the last three years.

The company is also spending money to bring in streaming subscribers. This year, it is expected to clear about $ 700 million in free cash on more than িয়ন 30 billion in revenue.

Only time will tell. In the last quarter, Paramount brought in 6.3 million subscribers, up from 62 million. That doesn’t count 68 million regular Pluto viewers, which the company says is a double-digit percentage increase from a year ago.

Note that Paramount’s creamed free cash flow, when calculated against the company’s recent stock market value of 20.8 billion, yields 3.4% free cash. That’s nothing, and analysts predict free cash flow could reach $ 2 billion or more by 2026. What makes it possible is that it implies a margin lower than what the old Viacom and CBS achieved. If these predictions prove correct, Buffett will receive a 10% free cash return.

“This combination of traditional assets and streaming assets is a real advantage, both in our ability to accelerate our business and drive customers and create more attractive economies and margins than a pure play streamer,” Bakish told me in February. He gave two examples of how old-fashioned distribution could reduce the risk of creating streaming content. Has launched a cowboy show called Paramount 1883 On the wire of his hit fans Yellowstone Before moving 1883 Exclusively for Paramount +. And the company has used a 45-day theater window to help pay for movies that ended up streaming.

At first glance, Netflix is ​​the favorite and best hitmaker of many big fans, judging by its 221 million streaming subscribers and a large collection of recent awards. But it has burned more than 8 8 billion in cash in the last six years. Investors have revolted against the cash burner after Netflix’s growth broke. This quarter, it predicted a loss of two million customers. The company plans to launch a cheap, ad-supported subscription level, but it takes time to set up an ad business.

We still don’t know how attractive Netflix would be as a service if the company had to bring content costs down to a level that makes consistent positive cash flow. Conversely, we do not know whether future free cash estimates will pan out if the company needs to raise costs to revive growth. Two analysts have estimated Netflix’s 2026 free cash flow; One says $ 5.5 billion and the other says $ 9.5 billion. Midpoint, 7.5 billion, both estimates headline revenue growth and a margin that is much higher than what Viacom and CBS created in 2016.

Bottom line: Netflix has four times the market value of Paramount today, but it’s not clear if it could generate four times as much free cash flow a few years from now. Maybe it will prove to be a technology company that is not limited by the traditional limitations of depositing cash to try to hit. But if it’s just a show business company with which to make a major start online, Buffett’s bet could perform.

Write to Jack Huff at [email protected] Follow him on Twitter And subscribe to his baron’s Streetwise podcast.