Is Comcast Stock Undervalued At $56?

CMCSA: Comcast logo

Despite a 70% rise from its March 2020 lows, at the current price of $56 per share, Comcast stock (NASDAQ: CMCSA) still looks undervalued. CMCSA stock has increased from $33 to $56 off its recent bottom. 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. In less than a year from its launch, Peacock has around 42 million subscribers, helped by the platform streaming some big ticket items like “The Office.”  With Comcast recently signing an exclusive agreement with WWE Network to stream wrestling, the subscriber count is expected to only grow in the coming months. 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 Comcast (CMCSA) Stock Has Gained 67% Between 2018-End And Now has the underlying numbers.

Some of the stock price rise between 2018 and 2020 is justified by the 10% rise in revenues. This was offset by a drop in margins from 12.4% in 2018 to 10.2% in 2020. On a per share basis, earnings decreased from $2.56 to $2.30 during this period. Despite lower earnings, the P/E multiple went up from 13x in 2018 to around 23x at the end of 2020. Though the multiple dropped in early 2020 after the outbreak of the coronavirus crisis, it recovered in the latter half of the year, after Comcast’s foray into streaming. Thus, with the stock rising on expected future growth and earnings remaining subdued for 2020, the P/E multiple saw a significant jump. The multiple currently stands close to 25x. We believe the multiple will likely settle around 21x in the near term, while higher earnings will drive the stock price even higher.

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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 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. – came to a virtual halt due to the pandemic. Additionally, the cord-cutting 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, whereas in Q1 2021 the company’s revenues, in fact, increased by 2.2%.

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. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. 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 Israel. The company is currently focusing on streaming, with Peacock making a good debut in July 2020, having a current (as of March 2021) subscriber count of 42 million. The company’s agreement with WWE Network will help it expand its subscriber base. Also, traditional businesses are expected 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 valuation works out to $60 per share.

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