Why We Are Revising Our Price Estimate For Time Warner Cable To $198

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Time Warner Cable‘s (NYSE:TWC) recent results underscore the changing complexion of the company’s business. Even though the company made its name in the past selling cable TV services, it is the high speed internet segment that is leading the growth charge in recent years. We expect Time Warner Cable’s high-speed internet business to continue to bring in more customers, while its pay-TV business will likely continue losing customers in the foreseeable future. However, we believe that the pay-TV subscriber losses will not be as severe as they have been in the last few years. Consequently, we are revising our price estimate for Time Warner Cable to $198.

See our complete analysis for Time Warner Cable

High Speed Data Segment Will See Continued Growth

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The high-speed data segment has led the growth for Time Warner Cable in recent years, with the segment’s subscriber base growing from less than 8.0 million in 2007 to around 12.8 million as of 30th June 2015. [1] Time Warner Cable has also been steadily increasing its Fee per Broadband Subscriber in the past few years. This figure has increased from around $42 per month in 2007 to over $54 in 2014. We have revised our estimates upwards for this driver of growth and we believe that this figure can reach $83 by 2022 as opposed to our earlier projection of just under $80. Similarly, Time Warner Cable’s market share in the high speed internet market has also gone up from around 11.0% in 2007 to 12.8% in 2014. Exceptional growth in the last few quarters has led us to revise our estimates and we now believe that Time Warner Cable’s market share will reach around 14.1% by the end of our forecast period, as opposed to the earlier projection of 13.8%.

The demand for high-speed internet in the U.S. is being fueled by a growing need for speed and connectivity. High-speed internet penetration in the U.S. is currently around 76%, which leaves enough room for sustained growth in the segment. [2] We estimate that high-speed internet penetration will reach 95% in the long run. This will benefit the cable industry in particular as it accounts for approximately 60% of the U.S. high-speed internet market. [3] Internet video, online gaming and video-on-demand make up the bulk of internet traffic in the U.S. These means of entertainment consume high data volumes and require greater reliability. Fixed networks have an edge on mobile carriers with respect to both speed and reliability. These factors will help Time Warner Cable in consistently gaining internet subscribers in the long run.

Pay-TV Subscriber Base Will Decline At A Reduced Pace

Time Warner Cable’s pay-TV subscriber base has come down from 13.3 million in 2007 to 10.8 million by the end of June 30, 2015. [4] This can be attributed to a combination of factors, including market saturation, the rise of cheaper alternative platforms such as Netflix (NYSE:TWC), delays in the transition to a digital platform etc. However, Time Warner Cable was able to slow the pace of the subscriber base decline last year. The company lost 408,000 subscribers in 2014, which is significantly less than the 833,000 subscribers the company lost a year before. [4] Time Warner Cable’s pay-TV subscriber base shrank by 45,000 subscribers during the last quarter. [1] The second quarter is historically a weak quarter for the pay-TV industry and the subscriber base usually shrinks during this period. Taking this into perspective, the company had its best second quarter since 2008. By comparison, TWC had lost 152,000 and 191,000 subscribers during Q2 2014 and Q2 2013, respectively. [1] The company was also able to add subscribers in Q1 2015, the first instance of quarterly growth in the subscriber base since 2009.

This leads us to believe that Time Warner Cable’s pay-TV subscriber base will continue to shrink, albeit at a reduced pace. For the year 2015, we believe that the company’s pay-TV operations will lose around 260,000 subscribers, as opposed to our earlier projection of loss of 300,000+ subscribers. Taking a long-term perspective, we believe that Time Warner Cable’s pay-TV market share will drop to around 9.7% by the end of our forecast period, as opposed to the earlier projection of 9.2%.

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Notes:
  1. Time Warner Cable’s SEC Filings [] [] []
  2. The State of the Internet Q1 2015 Report, Akamai []
  3. NEARLY 1.2 MILLION ADDED BROADBAND IN THE FIRST QUARTER OF 2015, May 15, 2015, Leichtman Research Group, Inc. []
  4. Time Warner Cable’s SEC Filings [] []