The prime reason behind Time Warner Cable’s (NYSE:TWC) impressive stock performance is the growth in its broadband business. Even though the company has lost pay-TV subscribers, broadband growth has compensated both in terms of revenues and margins. Unlike Comcast (NASDAQ:CMCSA), Time Warner Cable has better managed its expenses and maintained its margin growth in 2011. This was partially due to its presence in large, upscale markets and partially because of its impressive broadband growth. The primary reasons why the company has been able to grow broadband subscribers and ARPU (average revenue per user) include a focus on large and upscale markets, consumer demand for faster broadband, good infrastructure, expansion into business segments, and the general adoption of broadband throughout the U.S. as customers discard their DSL connections.
Time Warner Cable Has Leveraged Increasing Adoption Of High Speed Broadband
Time Warner Cable has seen consistent growth in average monthly revenue per user for its broadband subscribers. This figure has increased from about $40 in 2009 to $43 in 2011. The growth has been primarily driven by customers opting for higher priced, faster broadband tiers such as Road Runner and Docsis 3.0. This adoption is driven by increasing demand for faster Internet due to expansion of streaming video services such as Netflix and a general change in customer preference for media consumption. In addition to the ARPU increase, the company’s broadband subscriber base has increased from 7.9 million in 2007 to 10.3 million in 2011. 
Cable companies such as Time Warner Cable are in an advantageous position to leverage the above trend and grow their broadband subscriber base. Customers prefer to receive all their services from a single provider as this works out to be cost-effective and convenient – a single bill for all services. This gives Time Warner Cable an advantage over pure-play companies.
Further, given that Time Warner Cable’s cable network is much more extensive and widespread than telecom operators’ fiber optic networks, the company has the opportunity to capture broadband subscribers before telcos can reach them. Additionally, the company’s focus on large, upscale markets such as New York and Los Angeles puts it in a good position to market its high-end broadband tiers.
Expansion In Business Services
Besides the residential market, Time Warner Cable is now looking to engage business customers which have traditionally been more associated with telecom operators such as AT&T (NYSE:T) and Verizon (NYSE:VZ). As a result, the company has registered significant growth in revenues from its business services. These revenues increased by more than 30% in the first half of 2012 compared to the same period last year.  This revenue base is still small, roughly 10% of residential revenues, and thus the expansion opportunity is huge.
Our price estimate for Time Warner Cable stands at $88, implying a discount of about 10% to the market price.Notes: