Foray Into Streaming To Have Minimum Impact On Comcast’s Stock

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CMCSA: Comcast logo
CMCSA
Comcast

Following a 28% decline since the April 1 lows of this year, at the current price of around $41 per share, we believe Comcast stock (NASDAQ: CMCSA) has reached its near-term potential. CMCSA stock increased from $32 to $41 off the recent bottom, compared to the S&P which increased by around 42% from its recent bottom. The rise in stock price was mainly driven by the expectations of a revival of consumer demand with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat.

After a healthy recovery over recent weeks, the stock currently is 7% above the levels at which it was at the end of 2017. We believe the company’s stock has reached its fair value as the stock price rise already seems to reflect expectations of revenue and margin growth in 2021 and entry into the streaming world. Our dashboard What Factors Drove 7.2% Change In Comcast Stock Between 2017 And Now? has the underlying numbers.

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Some of the stock price rise between 2017-2019 is justified by the roughly 28% growth seen in Comcast’s revenues during this period. However, higher revenue was completely offset by a 55% decline in profitability as net income margin dropped from 26.7% in 2017 to 12% in 2019. On a per share basis, earnings saw a 41% drop from $4.83/share in 2017 to $2.87/share in 2019. The drop in EPS was slightly lower than the drop in margins, mainly due to a 3.3% decrease in shares outstanding.

The drop in earnings was more than offset, though, by a rise in the P/E multiple from 8x at the end of 2017 to 15x at the end of 2019. The P/E multiple increased due to a drop in EPS as well as a rise in stock price. Despite lower EPS, the stock price increased as the sharp decline in margin in 2018 was primarily due to margins being unusually high in 2017 on account of large tax benefits received and not due to any deterioration in the company’s fundamentals. Margins remained almost flat in 2019. Thus, despite a drop in reported EPS, the stock price went up due to the future growth outlook. However, in 2020, the P/E multiple saw a marginal decline and currently stands at 14x, but is still close to 80% higher than the multiple at the end of 2017. We believe that Comcast’s P/E multiple is likely to remain around the 14x-15x range with the company’s entry into the streaming space with the scheduled launch of Peacock in July 2020 expected to lead to revenue growth and revenue diversification benefits.

Will There Be Further Upside In The Stock?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. The shutdowns in major cities across the globe led to people sitting at home, with home confinement leading to higher demand for streaming services and home entertainment options. Though lower consumer spending could adversely affect Comcast’s cable TV revenues in the first half of 2020, the launch of Peacock – Comcast’s streaming platform – in mid-July 2020 and the recently increased demand for streaming services, is likely to prove beneficial for the company.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

As the lockdowns are lifted and people venture out for work and other reasons, streaming demand could be slightly lower than what was seen during the recent months of complete lockdown. Additionally, Comcast will have to compete with giants such as Netflix, Amazon, and Disney in the streaming war. The market seems to have already factored in the expected benefits from the launch of Peacock, and we believe that any further major movement in stock price is possible only after seeing the initial response to the mid-July launch of Peacock. If the company manages to garner the kind of buzz and subscribers that Disney+ achieved a couple of months back, then we could see further upside, but if the launch is lukewarm like HBO Max, then an upside looks unlikely. As per Comcast’s valuation, Trefis has a price estimate of $41 per share for CMCSA’s stock.

While Comcast is likely to hover around its current price in the near term, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further perspective of the streaming world, see how Disney compares with Netflix.

 

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