Competitive Intensity And Travel Concerns Will Weaken Profitability

Key Takeaways

• Challenges in the broadband and wireless segments could restrict revenue and profit growth due to competition, pricing strategies, and promotion dependence.
  
• Theme park and media segments face risks from subdued international travel, macroeconomic impacts, and fluctuating advertising revenues, affecting overall profitability.
  
• Comcast's strategic investments across diverse growth areas, including broadband, streaming, and theme parks, are driving revenue growth and supporting its robust financial positioning.

Catalysts

Operates as a media and technology company worldwide.

• Comcast is facing operational challenges in its broadband segment due to increased competitive intensity, including mobile substitution, which has contributed to a slight uptick in churn. This could weigh on Comcast's revenue growth as it struggles to maintain or expand its customer base amidst heightened competition.
  
• The company's decision to focus on go-to-market changes with a five-year price lock and simplified pricing could require investment and lead to temporary EBITDA pressure. This could hinder earnings growth in the near future as these initiatives take time to gain traction and stabilize customer relationships.
  
• Comcast's theme park segment may encounter headwinds if international travel to the U.S. remains subdued, compounded by external factors such as anti-American sentiment affecting travel patterns. This may impact revenue forecasts as visitor numbers could fall short of expectations despite the new Epic Universe park.
  
• In wireless, while there is potential for growth, the reliance on temporary promotions may slow the evolution of ARPU as promotions roll off and pricing readjusts. This could limit Comcast's ability to translate subscriber growth into higher profits if customers prove resistant to post-promotion pricing.
  
• In the media segment, while Peacock is showing signs of improved monetization, the overall segment remains vulnerable to macroeconomic cyclicality in advertising revenue. Factors such as economic uncertainty could lead to advertising budget cuts, which in turn would impact revenue and hinder further improvement in profitability for the media arm.

Comcast Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Comcast compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Comcast's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.7% today to 10.4% in 3 years time.
• The bearish analysts expect earnings to reach $12.8 billion (and earnings per share of $3.82) by about April 2028, down from $15.7 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 11.0x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Media industry at 16.8x.
• Analysts expect the number of shares outstanding to decline by 4.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Comcast Future Earnings Per Share Growth

Risks

• Comcast is investing in six key growth areas, including residential broadband, wireless, business services, theme parks, streaming, and premium content, which have shown positive effects on revenue growth and are positioned to drive further expansion.
  
• Strong capital allocation strategy, focusing on investment in growth areas and a robust balance sheet, ensures Comcast can continue executing its strategy, potentially supporting earnings through diverse revenue streams.
  
• Comcast's leadership in broadband and wireless, with innovations like the XB10 gateway and extensive WiFi network, could enhance customer satisfaction and retention, leading to stable or improved net margins.
  
• Business services continue to be a significant revenue generator, with mid-single-digit revenue and EBITDA growth, demonstrating potential for sustained improvement in profitability as they capitalize on market opportunities.
  
• Theme parks have experienced remarkable growth, and the upcoming launch of Epic Universe and expansion plans in attractive markets like the UK could significantly boost revenue and earnings, supported by strong prelaunch demand indicators.

Valuation

• The assumed bearish price target for Comcast is $35.06, which represents one standard deviation below the consensus price target of $40.5. This valuation is based on what can be assumed as the expectations of Comcast'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 $52.67, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $122.4 billion, earnings will come to $12.8 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $34.17, the bearish analyst price target of $35.06 is 2.5% higher. 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.