Comcast Stock Looks Undervalued Even At An All-Time High

Despite almost a 70% rise since its April 2020 lows, at the current price of $54 per share, Comcast stock (NASDAQ: CMCSA) still looks undervalued. CMCSA stock has increased from $32 to $54 off its recent bottom, almost in line with the S&P 500 which went up 75% 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. Along with continued strong demand for streaming, with gradual lifting of lockdowns and a successful vaccine rollout, Comcast’s traditional businesses like cable and theme parks are also expected to see recovery in the coming quarters. Thus, despite the stock being above the levels seen in the last few years, we believe expectations of higher revenue and earnings in 2021 and 2022 will provide Comcast’s investors with a potential gain of around 10%. Our dashboard What Factors Drove 59% Change In Comcast Stock Between 2018 And Now? has the underlying numbers.

Some of the stock price rise between 2018 and 2019 is justified by the 15% rise in revenues. This was offset by a slight drop in margins from 12.4% in 2018 to 12% in 2019. On a per share basis, earnings increased from $2.56 to $2.87 during this period. Along with higher earnings, the P/E multiple also went up from 13x in 2018 to around 16x in 2019. The multiple dropped in early 2020 after the outbreak of the coronavirus crisis, but has recovered over recent months after Comcast’s foray into streaming. The multiple currently stands close to 24x. We believe the multiple will likely settle around 20x in the near term, while higher earnings will drive the stock price rise.

Outlook

The global spread of coronavirus led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to lockdowns 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. – has come to a virtual halt due to the pandemic. Additionally, the cord-cutting has led to a drop in Cable TV and advertising demand. This was evident in the Q2 and Q3 2020 results of the company where Comcast’s revenues declined 12% and 5%, respectively. There was a minor recovery in Q4 2020 where revenues saw only 2.4% y-o-y decline.

There have been signs of reopening of the economy and lifting of lockdowns which led to a surge in the stock price. The successful vaccine rollout has also led to expectations of faster demand revival, with theatrical releases and reopening of theme parks likely to get back on track soon in the coming months. 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 currently focusing on streaming, with Peacock making a good debut in July 2020, having a current (as of Dec 2020) subscriber count of 33 million. Additionally, the company’s traditional businesses are also likely to see a turnaround in 2021 and 2022 as advertising, theme parks, and cable revenues get back on track. Thus, with investors’ focus having shifted to 2021 and 2022 numbers, strong revenue and earnings growth in the next two years will drive a further rise in the stock price. As per Trefis, Comcast’s valuation works out to $59 per share, reflecting a potential upside of 10% from its current level.

While Comcast stock may have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Netflix vs Tyler Technologies shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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