DOCSIS 40 Rollout And Broadband Demand Will Power Digital Ecosystems

Key Takeaways

• Structural cost advantages from technology upgrades and expanded service offerings could drive higher margins, earnings growth, and premium pricing power across Charter's full footprint.
  
• Strong mobile segment momentum, potential acquisition benefits, and cash flow gains position Charter for outsized shareholder returns and substantial long-term revenue growth.
  
• Cord-cutting, rising competition, high capital needs, heavy debt, and regulatory risks are threatening Charter's subscriber base, revenue growth, and long-term profitability.

Catalysts

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

• While analyst consensus sees strong Spectrum Mobile line growth as a revenue and EBITDA driver, the combination of Charter's new long-term MVNO relationship with T-Mobile and accelerating attach rates on higher value Unlimited Plus lines creates the potential for far faster mobile sub growth and higher ARPU than expected, leading to meaningful upside in both revenue and margins.
  
• Analysts broadly agree on margin improvement from network convergence and CBRS, but they may be underestimating the structural cost advantages from Charter's rapid DOCSIS 4.0 rollout, expanded multi-gig speeds, and growing fiber-on-demand capabilities across 100% of the footprint, which could drive both substantial cost reductions and premium pricing, leading to stronger net margin and earnings growth over time.
  
• The proposed Cox Communications acquisition, if approved, will immediately expand Charter's addressable market, substantially boost top-line growth through new, unpenetrated markets, and provide large-scale synergy opportunities in procurement and technology, with potential to accelerate both revenue and free cash flow per share while de-leveraging.
  
• Charter is uniquely positioned to capture and monetize the explosion in connected homes, smart devices, and the shift to streaming by leveraging its industry-leading bundled "seamless entertainment" platform and unified app marketplace-this increases upsell opportunities, reduces churn, and drives long-term ARPU and revenue expansion as the digital ecosystem grows.
  
• With peak capital intensity passing and new federal tax legislation set to deliver billions in permanent cash tax savings, Charter is entering a phase of rapidly accelerating free cash flow per share, combined with aggressive buybacks and falling share count, suggesting significant outperformance on earnings growth and shareholder returns relative to what is currently priced into the stock.

Charter Communications Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Charter Communications compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Charter Communications's revenue will grow by 1.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.5% today to 12.0% in 3 years time.
• The bullish analysts expect earnings to reach $7.0 billion (and earnings per share of $62.39) by about July 2028, up 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 bullish analyst cohort, the company would need to trade at a PE ratio of 12.8x 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

• Cord-cutting and the shift to streaming platforms continue to erode Charter's traditional video subscriber base, with management noting improved but still negative video sub trends, pressuring recurring revenues and reducing high-margin ancillary income over the long term.
  
• The proliferation of alternative broadband offerings, including 5G fixed wireless access and expanding fiber overbuild, is leading to heightened competition and customer churn, which management acknowledges as keeping the operating environment "competitive" and resulting in ongoing residential broadband subscriber losses that may cause top-line revenue stagnation or decline.
  
• Charter's heavy reliance on ongoing high capital expenditures for network upgrades, rural broadband expansion, and integration of the Cox acquisition strains free cash flow, as highlighted by near-peak capital intensity and rescheduling of significant CapEx into future years, which could limit the company's ability to return capital to shareholders and dampen earnings growth.
  
• The company's substantial debt burden-with $94.3 billion in debt principal and leverage above 4 times trailing EBITDA-reduces financial flexibility in a rising rate or more volatile macroeconomic environment, potentially squeezing net margins and constraining investment in growth initiatives.
  
• Increasing regulatory scrutiny and potential for new ISP-focused regulation or anti-trust actions, particularly around large mergers and pricing power, could result in new compliance costs, limit Charter's ability to raise prices, and adversely affect long-term profitability.

Valuation

• The assumed bullish price target for Charter Communications is $500.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $58.1 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $280.68, the bullish analyst price target of $500.0 is 43.9% higher.
  
• 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.