“Are we there yet? Anyone with young children knows how hearing this question over and over on a road trip can wear on even the calmest driver.”

MoffettNathanson analyst Michael Nathanson’s Friday report started off like an account of a regular family summer holiday, only to then take a turn to focus on recession worries among media and entertainment industry investors.

“We think media investors are feeling something similar as they try to decipher the timing and shape of a potential economic slowdown,” he continued. “To be clear those worries are not fanciful. Rather, a bevy of concerning advertising data points, especially from the digital companies so far, is driving this anxiety. Of course, media stocks are already signaling cloudy skies ahead as they have sold off as it becomes more evident that the advertising slowdown is real.”

So far, “TV advertising hasn’t collapsed as fast as digital advertising due to both a high degree of ad volume coming from prior upfront commitments and the need for bigger brand advertisers to keep reaching scaled audiences through sports and other live programming,” Nathanson highlighted.

However, if history is a guide, things are likely to get more challenging. “Looking back at prior recessions, traditional media ad formats such as TV and print focused on brand advertising, have notably underperformed online advertising,” the MoffettNathanson expert noted. “We think that this time shouldn’t be that different.”

The first victim in terms of stock outlook, per Nathanson’s report, is Paramount Global, led by CEO Bob Bakish. “As a result of our work, we are downgrading Paramount to ‘underperform’ (from ‘market perform’), lowering our sector earnings estimates to account for the initial ad weakness and updating our price targets to reflect our revised approach of using pure total company valuation approach.”

Why did he single out the company behind Paramount Pictures, Paramount+, Pluto TV, CBS, MTV, Nickelodeon and BET? “Despite the continued momentum at Paramount+, we downgrade Paramount as the growing risk of lower advertising puts additional pressure on the company’s ability to grow earnings before interest, taxes, depreciation and amortisation (EBITDA) and free cash flow (FCF) to match prior levels,” Nathanson explained.

Based on his reduced financial forecast, including dropping his 2022 EBITDA estimate by 6.0 percent to $3.61 billion and his 2023 EBITDA projection by 7.1 percent to $3.16 billion, he also cut the stock price target on the company by $12 to $18.

A star performance from Tom Cruise won’t help Paramount, Nathanson wrote. “Despite the strength from Top Gun: Maverick driven upside to the second quarter, we decrease our full-year EBITDA estimates … to reflect the more challenging ad backdrop,” he explained.

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