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Older viewers love CBS, but I suspect Warren Buffett didn’t just lose $2.6 billion on stock in the network’s parent company

Paramount Global

because he’s a big fan of NCIS: Hawaii. He could bet investors got show business wrong.

Traditional television and film distributors appear to be more of an asset than a liability in the face of the shift to streaming. It’s telling that the renowned value investor hasn’t jumped into shares of

Netflix

(Ticker: NFLX), which fell from a high of $700 last November to $190 at Tuesday’s close.

Paramount (PARA) brings together two veteran television companies: Viacom and CBS, both of which were cash cows. When Bob Bakish took over Viacom in 2016, TV ratings were weak and the company’s famous film studio, Paramount, lost money. But Viacom had generated $1.2 billion in free cash on revenue of $12.5 billion last fiscal year. Bakish increased TV ratings, returned films to profitability and increased free cash flow.

CBS, on the other hand, was then and still is a perennial ratings leader. In 2016, it generated nearly $1.5 billion in free cash on $13.2 billion in revenue. The two companies merged in 2019 with Bakish as boss and launched streaming service Paramount+ last year. The company also owns the premium channel and streaming service Showtime, as well as a free streaming service of commercials called Pluto TV.

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

Berkshire Hathaway

(BRK.A, BRK.B) after disclosing a holding, shareholders have lost 27% over the past three years.

The company is also spending big bucks to acquire streaming subscribers. This year is expected to release just around $700 million in free cash on more than $30 billion in sales.

Time will tell what this spending spurt does to growth. In the most recent quarter, Paramount added 6.3 million subscribers and reached 62 million. That’s not counting the 68 million regular Pluto viewers, which the company said was up a double-digit percentage year over year.

Note that Paramount’s constrained free cash flow when compared to the company’s most recent stock market value of $20.8 billion yields a free cash yield of 3.4%. That’s not nothing, and analysts who have ventured the forecast believe that free cash flow could hit about $2 billion by 2026. What makes that seem doable is that it implies a margin well below what legacy Viacom and CBS achieved. If those predictions prove correct, Buffett will have bought into a 10% free cash return.

“This combination of traditional assets and streaming assets is a real benefit, both in terms of our ability to accelerate our business and acquire subscribers, as well as create more attractive economics and margins than a pure streamer would have,” Bakish told me in February. He gave two examples of how old-fashioned distribution can reduce the risk of streaming content creation. Paramount introduced a cowboy show called 1883 via cable to the fans of his hit yellowstone before moving 1883 exclusively for Paramount+. And the company has used a 45-day cinema window to recoup the cost of movies that end up streaming.

At first glance, Netflix is ​​a much bigger fan favorite and better hitmaker, judging by its 221 million streaming subscribers and a large amount of recent accolades. But it’s also burned more than $8 billion in cash over the past six years. Investors rebelled against Cashburner as Netflix’s growth collapsed. A loss of two million subscribers is forecast for this quarter. The company plans to launch a cheaper, ad-supported subscription tier, but building an ad business takes time.

We don’t yet know how attractive Netflix will be as a service if the company has to cut content spending to levels that make free cash flow consistently positive. On the other hand, if the company has to increase spending to reignite growth, we don’t know if future free cash projections will materialize. Two Analysts Have Estimated Netflix Free Cash Flow for 2026; One says $5.5 billion and the other says $9.5 billion. The median of $7.5 billion projects both rapid revenue growth and a margin well above what Viacom and CBS generated in 2016.

Bottom line: Netflix is ​​now four times the market value of Paramount, but it’s far from clear that it can still generate four times free cash flow a few years from now. Perhaps it will prove to be a tech company free from the traditional constraints of raising money to achieve success. But if it’s just a show business company with an online clout, Buffett’s bet is likely to outperform.

Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.