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Declining Advertising Spending Impacts Paramount and Warner Bros

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Shares of Paramount Global and Warner Bros. Discovery Inc. experienced a decline as Wolfe Research downgraded their ratings due to concerns about decreasing advertising spending. The risk of TV advertising has always been the potential for steep declines in ad spending, which adversely affects profitability. Peter Supino of Wolfe Research emphasized that advertising revenue, being nearly pure profit, suffers significantly from faster declines.

Supino’s recent industry checks indicate that upfront spending by advertisers, which occurs before the new TV season begins, will fall short of expectations. This could result in the first pricing rollback in over a decade, excluding the effects of the COVID-19 pandemic. Concerns about a steepening decline phase prompted Supino to lower his rating on Paramount to underperform from peer perform and to adjust his Warner Bros. rating to peer perform from outperform.

Despite gains in their peer group, both Paramount and Warner Bros. experienced a 0.5% decline in morning trading, contrasting with the Communication Select Sector SPDR exchange-traded fund which rose 0.2%.

Supino highlighted that the upfront is off to a slow start this year, roughly a month behind the usual pace. Networks are seeking near-record pricing with over 15% increases compared to the previous year to compensate for ratings declines in the low-to-mid teens percentages. Conversely, ad buyers desire lower pricing.

In the past three months, Paramount’s stock has dropped by 24.3%, while Warner Bros.’ shares have decreased by 16.6%. In contrast, the communication ETF has rallied by 11.0% and the S&P 500 index has shown a 7.5% increase.

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