Paramount (PARA) stock closed down nearly 8% on Monday after getting hit with a downgrade from Bank of America.
Analyst Jessica Reif Ehrlich changed her rating to Underperform from Buy and slashed her price target to $9 a share from $32, noting that there's not much upside to shares if the company does not sell itself altogether or in parts.
"Our prior bullish thesis and valuation methodology was predicated on PARA's inherent asset value in a potential sale," the analyst wrote in a note to clients on Monday. "Despite receiving credible bids for several assets, it does not appear any significant asset sales are on the horizon."
The stock has fallen more than 20% year to date, significantly underperforming the S&P 500's (^GSPC) roughly 14% rise over that same time period.
Paramount has long been viewed as a potential acquisition target due to its small size relative to competitors. The company boasts a current market cap of just around $8.5 billion, compared to Disney's (DIS) $156 billion and Netflix's (NFLX) $189 billion.
The company has recently committed to divesting non-core assets as it works to pare down debt and improve its balance sheet. Last quarter, it announced the sale of Simon & Schuster to investment firm KKR after the publishing giant's sale to Penguin Random House collapsed late last year. The $1.62 billion, all-cash deal was completed last week.
Paramount's strong slate of assets suggests more M&A activity to come. Showtime and BET Media Group have been two assets recently entangled in sales rumors — although no deals have been made.
Reif Ehrlich said she was "surprised" Paramount "walk[ed] away" from potential buyers for Showtime and BET "given the secular challenges in the traditional media ecosystem."
"While we recognize management should try to extract maximum value, shares of PARA are down over 40% since May 1st," she added. "Our concern is the longer it takes to execute potential asset sales, the less value they could ultimately garner."
That, coupled with negative free cash flow and a challenging macro backdrop as linear ad revenue slumped 14% year over year in the latest quarter, creates an "unfavorable medium-term outlook," the analyst said.
"Upside risks to our forecast continue to be any potential asset sales which remains, in our view, the most clear-cut way for management to drive shareholder value."
Still, Paramount did report stronger-than-expected third quarter earnings last week as streaming losses significantly improved.
The company reported a direct-to-consumer (DTC) loss of $238 million, narrower than analyst expectations of $438 million and the $343 million loss seen in the year-earlier period.
Paramount now forecasts full-year direct-to-consumer losses in 2023 will be lower than in 2022, with anticipated fourth quarter DTC losses similar to the year-ago period.
Paramount+ added 2.7 million subscribers in the quarter, beating expectations of a 1.8 million user increase. In total, Paramount+ has reached more than 63 million subscribers with subscription revenue surging 46% amid the growth in paying users, along with recent price increases.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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