Comcast: valid reasons behind historic decline

Right now, Comcast It’s no exaggeration to say that stocks (NASDAQ:) have everything investors don’t like. Even compared to the steep market decline over the past few weeks, the industries in which Comcast operates have been devastated.

Comcast shares have lost more than a third of their value in less than eight months, which is unusual for the giants. In just 10 sessions, Comcast’s market capitalization plummeted by $35 billion.

It is a huge and surprising move. While the market is in a negative mood, it also looks like an opportunity, as a company with a long and successful history is trading at a much cheaper price.

Yes, a forward P/E ratio of around 10 sounds very cheap. In fact, this ratio indicates that the growth of the company is now complete. But it still is: looking at Comcast, it’s not hard to imagine that its growth has stalled.

Comcast Stock takes pictures from all directions

The past few weeks have been quite devastating for Comcast stocks. Sentiment toward each of the company’s major markets deteriorated.

over the past month Netflix’of (NASDAQ:) reported that far below estimates, investors have significantly lowered their earnings expectations in the online publishing space. As a result, activities in the publishing industry have decreased:

Post stock daily chart

Source: Investing.com

Amusement park stocks were hit by macro concerns, but SeaWorld Entertainment (NYSE:) managed to stay out of the trend.

But these declines are not surprising. There are legitimate concerns in all areas of Comcast’s business.

Source: Investing.com

The largest and most surprising drop was recorded among broadband providers. Inflation will of course suppress consumer spending and limit price increases in industry. Names like AT&T (NYSE:) and WideOpenWest (NYSE:) are also rapidly expanding their fiber optic networks, intensifying competition and pricing pressures. That’s why an industry that has been among the winners for years has been among the biggest losers in recent weeks:

Source: Investing.com

Finally, TV networks were struggling even before these sales, and Comcast was part of that group. by NBCUniversal the media business accounted for about 12% of Comcast’s EBITDA last year. An industry that was already under pressure suffered even greater losses due to macroeconomic concerns:

Source: Investing.com

Of course, market sentiment is a factor in all four charts. But nearly all of Comcast’s peers have fallen at least 15% in the past month. These stocks are generally the ones that have not suffered such large losses so quickly. In fact, historically, these names, including Comcast, have often performed relatively strongly during general market downturns. But right now it’s the other way around: CMCSA is down almost 20% while the ‘gn is down only 9%.

Broadband Threat to Comcast Stock

But the reason for this poor performance is the market’s reaction to changes in Comcast’s business.

Comcast Cable, which is included as a cable communications segment in the company’s income statements, is the most significant driving force behind Comcast’s stock. The division accounted for about 80% of the company’s profits. The importance of this division has grown in recent years as cable communications profits have grown, while the weight of the NBCUniversal and amusement park businesses has declined.

In retrospect, it is certainly a good thing that the cable communications segment is gaining importance. Between 2018 and 2021, the EBITDA of the cable communications segment increased by 30%. In other words, the simplest argument for the CMCSA stock, which has gone down so much; 80% of the company’s operations posted 9% compound annual growth in earnings, but the stock price is priced at near-zero growth for the period ahead.

But still, the growth may indeed have come to an end. American consumers are aware of the great price power that wireline carriers have enjoyed in recent years. The Internet became a necessity, and in many markets Comcast’s competitors were limited to lower quality alternatives such as DSL.

However, this situation is changing. Wireless network companies have started offering 5G data plans that can meet the needs of many consumers. Fiber companies such as WideOpenWest aim to increase their market share. Fiber optic connectivity is one of the most important elements of AT&T’s future growth strategy.

What makes wired connection such a good deal are the high profit margins. The cost to Comcast of serving a new business or household is minimal because the broadband infrastructure is already in place. There is almost no cost to increase prices for existing subscribers.

But when the number of subscribers drops or prices turn negative, this effect is reversed. Comcast loses every dollar of its discounted prices and loses a significant profit from every customer who unsubscribes. The number of video and voice communications customers is already declining. If the same happens to broadband consumers, the importance of this segment to the business means there will be a drastic drop in overall profits.

Investors fear that is exactly what will happen. As one Wall Street analyst put it last month, “Capital chasing fixed and wireless broadband customers in the country too much.“

Can the other segments hold?

There are also concerns in other segments in which the company operates. Amusement park operations created by Universal Studios centers around the world will continue to recover as part of the post-epidemic normalization process. However, amusement parks are not big enough; Even in 2019, this segment accounted for less than 8% of total profits. The same is true for film studios. This segment accounted for about 2% of total profits before the outbreak.

A long and steady decline in profits is also expected in the television networks segment; Peacock’s profit before loss was down nearly 8% year-on-year in the first quarter. Comcast paid a hefty sum to acquire UK-based Sky. With around 6% of the total profit, Sky doesn’t make much of a difference.

The Peacock streaming service could, in theory, move the stock. Even after the stock price plunge, Netflix still has a market capitalization of around $100 billion. A successful Peacock could also represent a significant portion of Comcast’s market capitalization of around $180 billion.

However, Peacock is a bit behind the industry. Expenses are high. Although the net subscriber growth of 180,000 in the first quarter is good, it is not an exceptional result. While Peacock will grow Comcast’s earnings over time, growth in broadcast earnings will be partially offset by weakening television networks. At least, if the wired communications segment falters, no other segment could get the company back on track.

Investment Case for Comcast Stock

Despite all this negativities, Comcast stock is definitely not a candidate for short selling. Buying this stock, which is trading at 10 times the forward earnings estimate, is certainly not the worst investment in the market. Competition concerns are likely to be exaggerated. In particular, wireless broadband has serious limitations in terms of bandwidth and service area.

However, it could also be dangerous to buy CMCSA shares as they have only seen very steep declines since September and April. There are reasons why Comcast’s month-long decline more than doubled losses in the overall market. It’s not because panicked investors indiscriminately sell everything they have. Instead, the fact that Comcast’s operations now appear to be far more diverse and unattractive.

Investors can bet the market is wrong, but at the very least they need to understand why this opinion is being formed.

Explanation: Vince Martin does not own any assets written in the article.

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