5G Competition And Surging Capex Will Decimate Broadband Returns

Key Takeaways

• Broadband and video subscriber declines, combined with stiffer competition, threaten revenue growth and erode high-margin earnings potential.
  
• High capital needs, heavy debt, and regulatory pressures may cut free cash flow, weaken returns, and undermine industry standing.
  
• Network upgrades, bundled services, rural expansion, strategic acquisitions, and favorable tax changes are driving growth, improving margins, and boosting free cash flow for Charter.

Catalysts

Operates as a broadband connectivity and cable operator company serving residential and commercial customers in the United States.

• Charter Communications faces persistent broadband subscriber losses amid heightened competition from 5G and fixed wireless access providers, threatening the company's ability to return to meaningful broadband customer growth and putting long-term revenue expansion at risk.
  
• Ongoing and accelerating declines in video subscribers due to consumer cord-cutting toward streaming platforms are expected to further erode Charter's high-margin video revenue and reduce overall earnings power, even as the company tries to reposition its video product.
  
• Rising capital expenditure requirements for ongoing network upgrades, including large outlays for DOCSIS 4.0 deployments and rural expansions, risk compressing free cash flow and damaging returns on invested capital in the coming years.
  
• The company's heavy reliance on high leverage leaves it increasingly vulnerable to rising interest rates and higher future refinancing costs, potentially constraining capital allocation for strategic projects and squeezing net income.
  
• Intensifying long-term regulatory scrutiny over broadband pricing and franchise obligations, along with possible entry by large tech and telecom players into broadband and content distribution, could drive down Charter's pricing power and margins, undermining the company's long-term industry positioning and profitability.

Charter Communications Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Charter Communications compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Charter Communications's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.5% today to 7.1% in 3 years time.
• The bearish analysts expect earnings to reach $3.9 billion (and earnings per share of $34.27) by about July 2028, down from $5.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from 7.3x today. This future PE is lower than the current PE for the US Media industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 4.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.1%, as per the Simply Wall St company report.

Charter Communications Future Earnings Per Share Growth

Risks

• Sustained long-term growth in data consumption, coupled with Charter's network upgrades to DOCSIS 4.0 and multi-gig speeds, positions the company to capture increased broadband market share and drive higher average revenue per user, supporting revenue and earnings growth.
  
• The convergence of offerings-broadband, mobile, and improved video packages with app integrations-combined with strategic pricing and packaging, is lowering churn across all segments and enabling multiple avenues for cross-selling, which can enhance net margins and boost total revenues.
  
• Expansion into subsidized rural areas is unlocking new customer growth opportunities as Charter leverages government support, scales its reach, and achieves additional operating efficiencies, setting up a long runway for organic revenue and free cash flow growth.
  
• The Cox Communications acquisition is forecasted to be immediately accretive to top line, margin, and levered free cash flow per share, supported by integration-driven cost and capital expenditure synergies that will likely improve long-term financial flexibility and shareholder returns.
  
• Recently enacted favorable federal tax legislation-restoring 100% bonus depreciation and expanding interest deductibility-will permanently reduce Charter's cash tax burden, materially increasing free cash flow per share for at least the next five years and providing additional funds for investment, deleveraging, and share repurchases.

Valuation

• The assumed bearish price target for Charter Communications is $275.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Charter Communications's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $275.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $54.8 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $279.89, the bearish analyst price target of $275.0 is 1.8% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.