On Thursday, Nomura Instinet downgraded Comcast Corporation (NASDAQ:CMCSA) from a “Buy” to “Neutral” on concerns that its growth was about to hit a major headwind. Namely, Comcast is dealing with a “narrowing runway” that will ultimately prove to be a drag on CMCSA stock, as competitors drive deeper into the company’s core-but-commoditized markets.
Yet also on Thursday, MoffettNathanson upped its price target on CMCSA stock from $45 to $52, anticipating significant stock buybacks that would increase the value of each share.
Even then though, MoffettNathanson’s raised expectations were packaged in something of a backhanded compliment that all investors may want to mull.
Increased Competition for CMCSA Stock
“[Comcast’s broadband business growth] may narrow as a decline in DSL subscribers, rising fiber competition from telco rivals, and wireless technologies, such as LTE Advanced and 5G, emerge. We consider the proliferation of aggressively priced – if often limited – over the top competition likely to intensify in 2018.”
He’s right about more competition, but take note of the fact that he’s talking about two different fronts.
One front is internet connectivity.
It’s a market that by and large has been dominated by owners of the phone and cable television lines being used. While competition is theoretically possible, logistically it’s a nightmare because entrenched companies are able to fend off newcomers.
That could change though, and is, largely with the advent of wireless 5G connectivity that’s on par with wired broadband. AT&T Inc. (NYSE:T), in the meantime, is working on the use of power lines rather than phone lines or coaxial cables as a means of delivering high-speed internet services.
The other front is video entertainment. Comcast’s cable operation was once an unthreatened force there too, but with internet-delivered options like Netflix, Inc. (NASDAQ:NFLX) or Hulu quickly becoming the new norm, that’s no longer a sacred cash cow for CMCSA stock either.
Not only is over-the-top streaming content growing in terms of hours consumed, that metric is accelerating as the competition heats up. The 22 million customers that dropped cable their cable television service in 2017 is 33% more than dropped it in 2016.
Acquisitions, Deals Won’t Help
The solution to the competition problem Comcast faces is simply working with or outright buying partners. Verizon Communications Inc. (NYSE:VZ) and T-Mobile Us Inc (NASDAQ:TMUS) have both been rumored targets.
This only serves to underscore the company’s recent interest in wading into wireless waters to offer bundled packages, a la AT&T and DirecTv. The former bought the latter in 2015, and is now cross-marketing one to the other’s customers.
It seems like a good idea, on the surface. A closer look at AT&T’s recent fiscal results, however, don’t exactly suggest the AT&T/DirecTv pairing is paying off in a big way. AT&T’s revenue was on pace to fall just a little more than 2% for 2017, while per-share earnings are only expected to rise about 2%.
It’s running into the same headwind Kvaal fears for Comcast; the outright commoditization of all communication services, largely driven by technological advancements.
In that light, something MoffettNathanson analyst Craig Moffett said of his raised price target for CMCSA stock takes on a whole new meaning. He explained, “Unless Comcast does a deal – and we’ll cross our fingers that they won’t; in fact we believe a deal is quite unlikely – they will have no choice but to buy back stock. And lots of it.”
If an acquisition isn’t the answer, and business as usual isn’t the answer, then what is the answer? There doesn’t appear to be a plan C.
Sure, a stock buyback would help, and Comcast still has plenty of cash flow to make that happen. Of the $83.6 billion worth of revenue it’s produced over the course of the past four quarters, $11.3 billion of it has been turned into free cash flow.
That cash flow is predicated on a certain level of profitability though, profitability that will be squeezed as competition heats up and a price war erupts.
Regardless, a stock buyback can’t be a reason in and of itself to expect big things from a company. At some point, real growth has to be mustered.
Bottom Line for CMCSA Stock
Nomura was right to deem CMCSA stock a “Hold.” It’s not an insulting stance and certainly doesn’t translate into doom for the stock. It’s an acknowledgment that, in its present condition and in light of its plausible prospects, there may be better opportunities out there.
At the same time though, Kvaal may not have described the brewing competition emphatically enough to get his point across to all investors. We’re at the cusp of a paradigm shift within the telco world. One that knocks down all barriers to entry, and blurs the line between medium and message. So far, it’s a shift CMCSA stock hasn’t proven it has a good handle on.
As of this writing, James Brumley held a long position in AT&T. You can follow him on Twitter, at @jbrumley.
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