Rising Competition Will Erode Broadband Profitability

Key Takeaways

• Increasing competition, market shifts, and regulatory pressures threaten core revenue streams and may compress margins for both Liberty Broadband and Charter.
  
• High capital requirements for network upgrades and reliance on Charter heighten risks, potentially limiting diversification and reducing future returns.
  
• Strong broadband demand, rural expansion, and disciplined financial management position Liberty Broadband for resilient growth, improved margins, and increased shareholder value through buybacks.

Catalysts

Engages in a range of communications businesses in the United States.

• With the continued rise in fixed wireless and satellite broadband offerings like Starlink, Liberty Broadband and its key asset Charter face mounting competition, which threatens to erode broadband market share and slow subscriber growth over the long term, putting sustained pressure on both top-line revenue and long-run cash flows.
  
• The secular shift from traditional cable towards streaming and pure-play digital platforms continues to reduce the legacy cable subscriber base, undermining core cash flow streams and making the company increasingly reliant on broadband-specific revenue, which may be subject to more intense price competition and margin compression.
  
• The concentration risk inherent in Liberty Broadband's dependence on Charter Communications exposes its future earnings to heightened downside, as any operational underperformance or strategic misstep at Charter will be magnified in Liberty's net income and asset value, with few avenues for diversification or risk mitigation.
  
• Persistent capital intensity driven by network upgrades-such as those required for rural fiber build-outs or transitioning to technologies like DOCSIS 4.0-will likely keep capital expenditures elevated for several years, reducing free cash flow and lowering returns on invested capital over the medium term.
  
• Growing regulatory scrutiny and the possibility of antitrust action against large broadband providers such as Charter could cap future pricing power, increase compliance costs, and threaten profitability, directly challenging Liberty Broadband's ability to maintain historical net margin levels and long-term earnings growth.

Liberty Broadband Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Liberty Broadband compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Liberty Broadband's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 86.4% today to 65.8% in 3 years time.
• The bearish analysts expect earnings to reach $750.2 million (and earnings per share of $5.64) by about July 2028, down from $896.0 million 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 19.5x on those 2028 earnings, up from 14.5x today. This future PE is lower than the current PE for the US Media industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Liberty Broadband Future Earnings Per Share Growth

Risks

• Liberty Broadband's significant ownership in Charter Communications provides exposure to continued strong demand for high-speed broadband as data consumption rises nationwide, which could drive resilient revenue and sustained margin expansion.
  
• The increasing emphasis on high-speed infrastructure and government funding for rural broadband presents growth opportunities, especially highlighted by GCI's expansion in remote Alaska, potentially increasing long-term revenue and enterprise value.
  
• Both Liberty Broadband and Charter maintain aggressive share repurchase programs, which may expand earnings per share and intrinsic value for shareholders, underpinning share price stability or growth.
  
• The company's financial discipline, demonstrated by active deleveraging and prudent refinancing at favorable terms, could result in lower future interest expenses and improved net income over time.
  
• The migration from legacy pay TV to broadband and bundled converged offerings not only reduces churn, but the rise of enterprise services and robust adjusted OIBDA performance at GCI suggests further upside for earnings and margins as market needs and product strategies evolve.

Valuation

• The assumed bearish price target for Liberty Broadband is $83.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Liberty Broadband'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 $130.0, and the most bearish reporting a price target of just $83.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $750.2 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $90.95, the bearish analyst price target of $83.0 is 9.6% lower.
• 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.