top partner

for CFD

Investors looking for outsize returns often gravitate to stocks with wide “moats.” Most people think of moats as deep ditches filled with water used to protect castles centuries ago.

However, investors use the term “economic moat” to describe businesses that competitors struggle to copy. Many investors credit Warren Buffett with popularizing this term, which he mentioned in his 1995 Berkshire Hathaway shareholder letter. Needless to say, he’s generated hundreds of billions in returns through his deep understanding of such moats.

Unfortunately, his investment in Paramount Global (NASDAQ: PARA) seems to have fallen short because of the changing nature of its moat. Here’s why.

The evolution of Paramount Global

Paramount Global is a conglomeration of formerly separate media businesses such as Paramount Pictures, CBS Communications, and Viacom. This consisted of content such as the Star Trek, Indiana Jones, and Godfather franchises on the Paramount side. It also included CBS and several cable TV networks such as MTV, Comedy Central, and Showtime.

Fortunately for Paramount Global, it still owns its content library, and it has leveraged those assets into its streaming channel, Paramount+, to stay competitive. But while a competitor cannot legally copy that content, the cord-cutting phenomenon has undermined cable TV, which continues to have a negative effect on its cable channels.

Although the company has not published detailed numbers, cable TV costs an average of $217 per month, according to Comparitech. Now, Paramount+ streaming subscribers get the streaming channel for $5.99 per month with ads and $11.99 per month for an ad-free version, which includes Showtime.

However, that lower price likely means that streaming will not fully compensate the company for the lost revenue, dramatically reducing the size of the economic moat. Given that reality, it is difficult to understand what attracted Buffett’s team to this stock.

How the changing moat affects the financials

The financials seem to reflect the transition and the smaller moat. For the first nine months of 2023, revenue of $22 billion was flat compared to the same period last year.

Revenue for Paramount+ rose 61% over the last year, and the subscriber base has grown to 61 million. Still, that made up only 22% of total revenue. The TV media segment’s revenue, which includes its declining TV properties, fell by 8%. Unfortunately for the company, this segment still comprises 68% of all revenue.

Also, thanks to rising costs, Paramount lost $1.1 billion in the first three quarters of the year, in stark contrast to the $1.1 billion in net income for the same time frame in 2022.

Such results may explain why Paramount slashed the dividend to $0.20 per share annually versus $0.96 per share following the release of first-quarter earnings. With its dividend yield of 1.6%, it closely matches the S&P 500 average dividend return.

PARA data by YCharts

Consequently, the stock has lost almost one-fourth of its value this year and approximately half since Buffett’s team bought shares in early 2022. Although that takes its forward P/E ratio to around 23, that may not be enough to attract investors with its narrowing moat.

The lesson to learn

Given Paramount Global’s circumstances, investors should probably not buy this stock. But more importantly, the story of this media stock should serve as a lesson, specifically how once-formidable moats can evaporate. This has likely happened to Paramount as streaming offers considerably lower revenue potential than cable TV in past decades.

Investors would do well to take the next step and look at the economic moats of all their stocks. Between changing technologies and shifting market trends, such moats are constantly changing.

Moreover, seeing these trends early can offer considerable rewards. If investors see a moat expand early or discover one that has begun to narrow, they can earn better returns by seeing opportunities early or sidestepping impending disasters.

10 stocks we like better than Paramount Global
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Paramount Global wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of November 6, 2023

Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

Read the full story: Read More“>

Blog powered by G6

Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.

For any inquiries, please contact [email protected]