Comcast Keeps Losing Cable Subscribers. Why That Makes the Stock More of a Buy.
There are lots of ways to play the future of generative AI, streaming sports, online gaming, the internet of things, and the metaverse. The stocks are pricey and often speculative. And then there’s Comcast . As the country’s largest provider of broadband, the company has literally laid the groundwork for each tech trend.
At just 11 times earnings, the stock can be had for a song versus buzzier tech names like Nvidia (ticker: NVDA), Meta Platforms (META), and Netflix (NFLX).
Comcast (CMCSA) was founded 60 years ago by Ralph Roberts as a small cable company in Tupelo, Miss. Now run by Brian Roberts, Ralph’s son, the business has come a long way from its Tupelo roots. It houses a broad collection of connectivity and media assets, including the Universal Studios theme parks and movie studios, the Peacock streaming video service, linear television networks including NBC, CNBC, and MSNBC, a growing cellular unit, and the Philadelphia Flyers ice hockey team and its arena. Comcast also owns one-third of Hulu, which it will almost certainly sell to Walt Disney (DIS) early next year for a potentially eye-popping payday.
While much of Hollywood has struggled in 2023, Universal Studios has had a huge year, thanks to Oppenheimer and The Super Mario Bros. Movie. Comcast’s new Nintendo theme park attractions are growing in popularity. And NBC controls the U.S. rights to the Olympics, one of the few events that still amasses viewers across traditional television and streaming platforms. The summer games are back again next year, in Paris.
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And yet, the reason to buy Comcast is for its broadband business—and because Comcast is dramatically undervalued. Comcast shares hit a 52-week high this past week, but they’re still some 25% below a 2021 peak.
Too many investors still think of Comcast as a cable TV provider, which is a dying business. This year, the percentage of American households that pay for cable or satellite TV will drop below 50% for the first time in decades. In the June quarter, Comcast had less than 15 million video customers, down 12.6% from a year ago. Over the last eight years, Comcast’s video subscriber base has been cut by a third.
For Comcast, though, there’s good news in cable’s demise—the cable TV business carries terrible economics, with razor thin margins.
In exclusive interviews with Barron’s, Comcast’s top three executives recently made the case for the stock and why it deserves a fresh look from investors.
Jason Armstrong, Comcast’s chief financial officer, says that the company’s diverse set of businesses has masked its overall financial strength. He says investors should put cable aside, focusing on Comcast’s six growth businesses, which have combined annual revenue of about $70 billion. Those businesses—broadband for residential, broadband for business, wireless service, theme parks, streaming, and studios—together are growing about 10% a year.
CEO Brian Roberts adds that those growth plays will increase to 75% of Comcast’s business in the next few years. And profits should improve accordingly, he says, since the faster growers, like residential broadband and business services, have higher margins than residential video.
The bottom line is that Comcast’s pretax earnings are growing faster than its revenue. And because the pace of investment is slowing, free cash flow is growing faster still. Comcast is also reducing its share count through aggressive stock repurchases, boosting earnings and cash flow per share even more.
“We see that model being sustainable,” Roberts says. “That’s a very different story than just a couple of years ago.”
In its latest quarter, Comcast’s earnings per share rose 11.9%, while net cash flow increased 13.8%. Comcast repurchased $2 billion of stock in the quarter, and $11 billion over the last four quarters; meanwhile, it now has a 2.5% yield, after tripling its dividend payout over the last decade.
And the stock is cheap, notes President Mike Cavanagh. He cites recent research from Goldman Sachs analyst Brett Feldman, who writes that Comcast’s profits are growing at more than twice the rate of the S&P 500, and yet its stock trades at a 40% discount to the market. Comcast fetches a price-to-earnings ratio of less than 11 times Feldman’s 2024 EPS forecast.
Comcast is disproving the skeptics who saw two threats to its broadband franchise: new fiberoptic networks from rivals—financed with cheap capital—and 5G fixed wireless.
MoffettNathanson analyst Craig Moffett says both threats are fading. The spike in interest rates this year makes it less alluring to build out new fiber networks, he says. Verizon VZ +1.03% (VZ) and T-Mobile TMUS +0.44% US (TMUS) have, at the same time, slowed their rollout of fixed wireless.
Comcast’s Armstrong says that the average U.S. home now uses about 700 gigabytes of data every month, about double pre-Covid levels, while mobile phone subscribers use just 15 to 16 gigs a month. In short, fixed wireless is an inefficient use of mobile spectrum—and the quality falls short of Comcast’s residential broadband.
Meanwhile, Roberts sees another step up in broadband demand on the horizon: “Sports will drive a massive increase in consumption of bits in your home,” the CEO says. “It starts with NFL Sunday Ticket, which for two decades required a satellite dish, and is now going to be on YouTube TV. And then in January, we have an NFL wild card playoff game exclusively on Peacock. There will be 15 or 20 million people streaming the same event simultaneously—that’s never happened for anybody.”
Comcast’s broadband customer base was about flat in the latest quarter at just under 30 million, but broadband revenue was up 4.4%, thanks to higher rates. Armstrong says people are using more connected home devices, while opting for higher speeds. He says 75% of Comcast’s customers now pay for speeds over 400 megabits, triple the prepandemic figure.
Lastly, there’s mobile wireless. Comcast ended the second quarter with six million lines for its Xfinity Mobile service, nearly 30% more than a year earlier, while second-quarter wireless revenue was up 20%. Armstrong concedes that the history of MVNOs, or mobile virtual network operators—cellular networks without their own spectrum—“is not great.” But he says Comcast isn’t a typical MVNO. While it has the perpetual right to use Verizon’s 5G network, Comcast switches as much wireless traffic as possible to its own Wi-Fi hot spots.
In fact, Armstrong says that 90% of its wireless traffic is carried on Wi-Fi, which makes its network faster, on average, than Verizon’s own service. So far, Xfinity Mobile serves just 10% of the customers in its service area. “We’ve barely scratched the surface,” Armstrong says.
Beyond the business itself, there’s a substantial wild card for Comcast—the expiration of its Hulu partnership with Disney, which owns two-thirds of the streaming service. Comcast owns the remaining third, but likely not for long.
Under a 2019 agreement, Comcast has the right to put its minority stake to Disney in January 2024 at a minimum valuation of $27.5 billion. That would give Comcast about $9 billion in cash, though its take-home would be less since it’s borrowed $5 billion against the stake. Hulu’s valuation will ultimately be determined by an independent appraisal, which will focus on what an independent buyer might pay for the business.
Sure enough, Comcast’s stake in Hulu could be worth considerably more than the 2019 minimum. Hulu’s subscriber base has roughly doubled since that agreement, making it 20% the size of Netflix which has a market value of $190 billion.
Using a per-subscriber comparable, Hulu is worth $40 billion, which would mean about $13 billion for Comcast. Hulu, meanwhile, had $10.7 billion in 2022 revenue, a third of Netflix’s. On a comparable revenue basis, then, Hulu is worth $65 billion, putting Comcast’s stake north of $20 billion.
The market has surely already accounted for the $27.5 billion Hulu valuation, but a higher appraisal might still surprise Wall Street and serve as a catalyst for Comcast stock, especially since the company is likely to use the windfall for more buybacks.
For years now, Comcast has seen its core business fade away, an uncomfortable dynamic for any investor. But the good news is building.
“Yes, there are some weaknesses here,” Moffett wrote after Comcast’s earnings. “But the good here vastly, vastly outweighs the bad. Comcast is performing very, very well. And it is still, in our view, undervalued.”
