Why Paramount Global Shares Soared Last Month
What happened
Shares of Paramount Global (NASDAQ: PARA) (NASDAQ: PARA.A) surged in May. The vote-wielding Class A stock with the PARAA ticker gained 16.8% last month, while the nonvoting Class B ticker PARA rose 17.9%, according to data from S&P Global Market Intelligence. The gains were sparked by a sizable investment by Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
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So what
Berkshire invested $2.6 billion in Paramount during the first quarter, according to regulatory filings that were posted on May 16. Berkshire is now the entertainment conglomerate's largest shareholder, owning an 11.3% stake in the nonvoting Class B stock. Share prices soared more than 15% the next day.
Buffett's insurance-backed investment conglomerate has not yet shared the thinking behind this investment, but Paramount chief financial officer Naveen Chopra addressed the move two days later. Speaking at the MoffettNathanson Media & Communications Summit, Chopra said that Buffett appears to be pouncing on a deep-discount value investment:
I think the market as a whole is starting to understand that you can't just compare Paramount to what we call legacy pure-play streaming companies. This combination of traditional media and streaming does yield a different model, it does yield different economics. And I don't think that's been reflected in how our companies have been valued over the last couple of years. So I think that's an opportunity for all investors.
Now what
The May surge lost most of its momentum on June 2, as analyst firm Wolfe Research cut Paramount's rating from outperform to underperform. Wolfe analyst Peter Supino argued that the Paramount+ video-streaming service is seen as a lower-tier service next to the market-leading streaming services of Netflix, Walt Disney, and Warner Bros. Discovery. Since the company formerly known as ViacomCBS has reorganized itself around the Paramount+ streaming operation, the research note said, that second-tier position could be a severe headwind in the long run.
Wolfe's report turned some heads on Wall Street, driving Paramount's shares nearly 10% lower over the next two days.
Investors should weigh Wolfe's analysis against the proven value-investing mettle of Warren Buffett and his Berkshire team. The popular Class B stock trades at just 5.4 times trailing earnings and 0.7 times sales today, making it the most affordable option among Wolfe's video-streaming names by a wide margin.
So Paramount Global looks like a polarizing ticker right now. Traditional value investors might want to follow Buffett's lead and take a deeper interest in these low-priced stocks. In contrast, growth investors like myself prefer the stronger market position of streaming leaders Netflix and Disney.
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Anders Bylund has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares), Netflix, and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $145 calls on Walt Disney, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
