In the wake of negative broadband subscriber growth at Comcast Corp. and Charter Communications Inc. last week, Barclays analyst Kannan Venkateshwar is taking a more cautious view on the cable sector.
He downgraded Comcast shares
to equal weight from overweight Monday, while lowering his rating on Charter’s stock
to underweight from equal weight, warning that the companies could remain under pressure given macroeconomic and competitive factors.
Comcast shares are down 1.3% in Monday morning trading while Charter shares are off 1.0%.
A key source of concern among cable investors is the presence of emerging competition in the market for internet services, as wireless companies push forward with fiber and fixed-wireless-access offerings. While Comcast’s and Charter’s management teams made some acknowledgment of the competitive landscape on their earnings calls, they maintained that the biggest factor driving recent performance was that people have been moving homes in smaller numbers than before.
Venkateshwar didn’t seem sold on the cable companies’ explanations.
“While cable has gained share vs DSL over time and therefore lower moves would impact growth rates, it is mathematically impossible to get to negative growth as seen last quarter, purely on account of lower move activity,” he wrote. “In addition, the decline in move activity is not new and has been going on for years and tends to worsen during recessions.”
He added that even if move rates were to improve, “there are new elements that are likely to reduce cable’s share of gross adds” — namely the emerging competitive dynamics.
“Charter management almost seems in denial of competition in talking down its impact, but if TMUS does grow fixed wireless access (FWA) to the full extent of its guidance range (~500k+/quarter), TMUS alone would be bigger than Altice by the end of next year,” Venkateshwar continued. “It is tough to see this not impacting cable structurally when cable net adds overall have been ~3mm in normal years and TMUS and VZ alone could add 2-2.5mm FWA subs a year.”
Venkateshwar isn’t sure that FWA represents “a viable solution for telecom operators long term” given capacity requirements, but said that for the moment, T-Mobile US Inc.
and Verizon Communications Inc.
have “low marginal costs due to excess spectrum.”
“Consequently, even if FWA proves unviable long term, it could still be a significant headwind for cable over the next 2-3 years,” he wrote.
Additionally, with the help of government funding, more people could move from DSL over to fiber, and AT&T Inc.
has been focused on growing its fiber footprint.
Venkateshwar acknowledged that one criticism of his analysis may be that he isn’t giving the cable companies enough credit for growing their own footprints, but he doesn’t see much correlation between footprint expansion and broadband growth rates for Comcast, Charter, and Altice USA Inc.
when looking at the past five years. Accordingly, he expects the companies could get even less marginal benefit in a world with growing competition.
“Overall, these factors imply that the largest cable companies, Comcast and Charter, are likely past peak growth and the debate therefore boils down to the degree of downside to broadband net adds going forward,” he wrote. Venkateshwar said that his analyst suggests “cable providers could be at flat growth next year and potentially negative thereafter unless their pace of footprint expansion and marginal penetration of this expanded base accelerates.”
He noted that the companies have been growing wireless subscribers, though he has questions about the long-term economic potential of their wireless involvement. As it stands, Charter and Comcast have a mobile virtual network operator (MVNO) arrangement with Verizon that allows the companies to leverage Verizon’s network.
“This strategy makes sense to test out the market and launch a service, but to anchor long-term strategic pivot of the scale that cable companies are attempting on someone else’s network is not viable in our view,” he wrote. “If cable companies continue to face challenges in broadband, which we think is likely, they may have little choice but to invest in more extensive wireless infrastructure in some form to extract the benefit of scale in wireless.”
Venkateshwar joins several other analysts who downgraded Comcast’s stock in the wake of the latest results. Shares of Comcast are off 26% so far this year as shares of Charter are down 34%.