After having increased almost 60% from its March lows of this year, at the current price of $51 per share, Comcast stock (NASDAQ: CMCSA) looks slightly overvalued. CMCSA stock increased from $32 to $51 off the recent bottom, similar to the S&P which increased by around 60% from its recent lows. The rise in stock price was mainly driven by the Fed’s stimulus measures. Additionally, the company’s foray into streaming with the launch of Peacock in mid-2020 also helped boost the stock price as streaming demand has been high during the pandemic. Though streaming will continue to perform well despite rising Covid cases, recovery in Comcast’s traditional businesses like cable and theme parks will take longer than earlier expected. With the stock more than 10% above its December 2019 level after a sharp rise over recent months, we believe it has a slight downside and will likely drop below $50 in the near term. Our dashboard What Factors Drove 28% Change In Comcast Stock Between 2017 And Now? has the underlying numbers.
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, this effect was partially offset by a drop in P/S multiple from 2.2x in 2017 to 1.9x in 2019. The multiple declined as the company’s margins deteriorated over recent years. Despite higher revenues, net income margin fell in 2018 (due to base effect – tax benefits received in 2017) and remained flat in 2019. The P/S multiple dropped further in early 2020 after the outbreak of the coronavirus crisis, but has recovered over recent months and currently stands at little over 2x. We believe that the fears of a second Covid wave and delayed recovery will lead to a slight decline in the company’s P/S multiple which will settle a little below 2x, leading to a lower stock price.
Where is the stock headed?
The global spread of coronavirus led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to lockdown in almost all major cities over the globe, film shooting has been halted while amusement parks have been shut for months. The company’s traditional key revenue sources – theatrical, theme parks, etc – had come to a virtual halt due to the pandemic. Additionally, the cord-cutting has led to a drop in Cable TV and advertising demand, affecting revenue projections. This was evident in the Q2 and Q3 2020 results of the company where Comcast’s revenues declined 12% and 5%, respectively.
Though recently there have been signs of reopening of the economy and lifting of lockdowns which led to a surge in the stock price, theatrical releases and reopening of theme parks will still take some more time to get back on track. Also, the recent surge in Covid positive cases in the US could prove to be an impediment in the path of the company’s healthy growth as re-imposition of lockdowns will lead to a further decrease in the revenue growth outlook. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. The company is focusing on streaming, with Peacock making a good debut with it currently having 22 million subscribers since its launch in July 2020. Though streaming will continue to enjoy high demand, another Covid wave and lockdown could put Comcast’s primary businesses at a meaningful risk.
We believe that the market has been slightly over enthusiastic about Comcast’s stock. Unless the advertising, theme parks, and cable revenues get back on track, we will not see major revenue growth in 2021, while earnings will also remain subdued. A delayed recovery would mean reduction in the P/S multiple. Thus, we believe that, along with streaming, recovery in the traditional business segments is key to Comcast stock sustaining itself at its current level, which looks unlikely in the near term. As per Trefis, Comcast’s valuation works out to $49 per share, which means that the stock is currently overvalued and is likely to see a marginal drop in the near term.
For further perspective of the streaming world, see how Disney compares with Netflix.
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