Factors That Could Potentially Trigger Movement In Comcast’s Stock Price

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Comcast‘s (NASDAQ:CMCSA) is the largest pay-TV operator and Internet Service Provider (ISP) in the United States. Cable companies have lost thousands of customers over the past few years, but Comcast has managed to slow the pace of subscriber losses in recent quarters, primarily due to its triple play bundling. We believe that Comcast will continue to lose pay-TV subscribers in the future at a similar rate of decline it has experienced in the last few years. In contrast, we expect steady growth in the broadband operations driven by rising residential and business demand for high-speed data services.

Comcast also operates the varied content business of NBCUniversal (NBCU) which owns a broadcast network, cable channels, a film studio and theme parks. This segment has been an important growth driver for the company and we believe that NBCU is likely to benefit from the continued success of its films, broadcasting network and theme parks.

Our price estimate for Comcast stands at $62.41, implying a premium of about 7% to the market. However, there are certain triggers and plausible developments that can move the stock significantly in the next couple of years. Specifically, we believe that a rapid erosion of the overall pay-TV subscriber base and accelerated growth in NBCU’s broadcasting and filmed entertainment segments are some of the key plausible events that can trigger stock price changes for better or worse.

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Pay-TV Subscriber Losses Could Accelerate Rapidly (~10% Downside)

Pay-TV market has become saturated over the past few years. Even though total TV households in the U.S. have inched upwards, increasing from 114.2 million [1] in 2012-13 to 116.3 million [2] in 2014-15, the pay-TV subscriber number has remained stagnant at around 100 million for the past few years. [3] Top pay-TV providers are currently losing a combined 100,000+ subscribers per year, having lost around 105,000 [4] and 125,000 [3] subscribers in 2013 and 2014, respectively. This rate of erosion in their subscriber base has allowed the pay-TV providers to remain profitable as the loss of subscribers is more than offset by rising subscription fees. In our base scenario, we believe that the pay-TV subscriber base will shrink by 100,000 subscribers every year and just dip below 100 million by the end of our forecast period, resulting in a pay-TV penetration of just under 85%.

However, the rate of erosion of subscriber base could potentially accelerate to a point where the pay-TV industry might lose more than one million subscribers per year. TiVo recently released a white paper which estimates that approximately 1.5 million customers plan to cut the cord of their pay-TV service. The rise of alternative platforms, such as online streaming services, can also hasten the subscriber losses for the pay-TV industry. Streaming giant Netflix already has a thriving subscriber base and other content providers such as Dish Network, Sony, Apple, HBO, CBS, and etc., are also launching their own streaming services. These services will be priced considerably lower than the subscription fees charged by traditional pay-TV providers. This could lead to a mass exodus and the pay-TV market could drop down to 90 million in the next six to seven years, resulting in a pay-TV penetration of around 75%. This turn of events will also have a negative effect on the Comcast’s market share, which could potentially drop down to 20%. The company will also not be in a condition to raise prices as it will be competing against cheaper streaming alternatives. All these developments could bring down Comcast’s price estimate to $56.07, which would be a 10% correction to our current estimate of $62.41.

Films, Broadcasting Could Push NBCUniversal Past $40 Billion (~10% Upside)

NBCU contributes more than 32% to Comcast’s stock value, according to our estimates. Universal Studios is an integral part of this segment, bringing in approximately $5 billion in revenues last year. [5] In the age of big-budget movies, the studio is making money off of movies that are produced at a very reasonable budget. The studio produced or distributed fifteen movies in 2014 and eleven of those had a budget of $40 million or less. Low budget movies have lower risk attached to them and recover their costs if they have one or two good weeks at the box-office. The studio’s margins improve as it does not have to take a big hit if the movie tanks and every once in a while, a movie performs exceptionally and grosses $500 million or more,  as seen with Fifty Shades of Grey, Ted and Despicable Me 2. The studio has also invested in lucrative movie franchises such as The Fast And The Furious, Fifty Shades, Despicable Me, Jurassic Park, etc., which will serve the studio well in the years to come. We believe that filmed entertainment revenues will be around the $7 billion mark by the end of our forecast period.

NBC’s broadcasting business has also been performing exceptionally well in the last few years, bringing in over $8.5 billion in revenues last year. [5] NBC finished the 2013-14 primetime season as the number one ranked broadcasting network in the coveted 18-49 demographic. [6] The network has continued to build on that success and was number one in the 18-49 adult demographic at the halfway point of the 2014-15 season. [7] The network has a dependable roster of shows, including The Voice, The Blacklist, Chicago Fire, Grimm and Chicago P.D., and we believe that NBC’s broadcasting revenues can cross $13 billion in the next six to seven years. Similarly, NBCU is also looking to expand its theme park business by reportedly opening a theme park in Okinawa, Japan. [8] We expect theme park revenues and cable network revenues to be around $4.3 billion and $11 billion respectively by the end of our forecast period. Consequently, Total NBCU revenues will be north of $35 billion by 2021.

Broadcasting and filmed entertainment business are highly uncertain in nature and one or two runaway hits can increase the revenue numbers exponentially. NBCU has shown the tendency to produce such runaway hits in both its broadcasting business (The Blacklist, The Voice) and its filmed entertainment business (Ted, Despicable Me 1 & 2, Furious 7). In an optimistic scenario, NBCU could potentially churn out many more highly successful shows and movies, which could push its total revenues past $40 billion by the end of our forecast period. The growth in revenue along with an improvement in margins could result in a potential upside of around 10% to our current price estimate.

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Notes:
  1. NIELSEN ESTIMATES 115.6 MILLION TV HOMES IN THE U.S., UP 1.2%, May 7, 2013, Nielsen []
  2. NIELSEN ESTIMATES 116.3 MILLION TV HOMES IN THE U.S., UP 0.4%, May 5, 2014, Nielsen []
  3. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [] []
  4. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group []
  5. Comcast’s SEC Filings [] []
  6. NBC Finishes No. 1 In 18-49 Demo For 2013-14 Primetime Season, September 16, 2014, Deadline []
  7. ‘The Voice’ Delivers Two of the Top Four 18-49 Ratings on the Big 4 Broadcast Networks for the Primetime Week Ending March 22, March 24th, 2015, TV by the Numbers []
  8. New theme park to be built near military bases in Okinawa, Japan, March 18, 2015, LA Times []