Expanding Fiber Networks And AI Will Build A Bright Future

Key Takeaways

• Altice USA's fiber network expansion and AI-driven efficiency strategies are poised to drive subscriber growth, reduce expenses, and enhance margins.
  
• By broadening its product offerings and targeting income-constrained consumers, Altice USA aims to unlock new revenue streams and improve customer loyalty.
  
• Increasing competition, high leverage, and shifting consumer preferences are straining Altice USA's revenue growth and profit margins.

Catalysts

Provides broadband communications and video services under the Optimum brand in the United States, Canada, Puerto Rico, and the Virgin Islands.

• Altice USA plans to expand its fiber network and increase the availability of multi-gig speeds, which is expected to drive subscriber growth and improve broadband revenue starting in 2025.
  
• The company is launching new strategies tailored for income-constrained consumers, which include pricing schemes and perk systems aimed at retention and attracting new subscribers, potentially stabilizing and increasing residential ARPU (average revenue per user).
  
• Altice USA is focused on driving efficiency through AI and digital solutions to reduce operating expenses; the expected reduction in the other operating expense line by 4% to 6% by the end of 2026 should enhance net margins.
  
• With plans to broaden its B2B product portfolio, grow mobile penetration, and introduce new value-added services in 2025, Altice USA aims to unlock new revenue streams and improve customer loyalty, contributing to revenue growth.
  
• Lightpath, Altice USA's fiber infrastructure business, has a significant growth opportunity with an AI-related sales pipeline of nearly $1 billion, which is expected to boost revenue and profitability in the coming years.

Altice USA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Altice USA's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.8% today to 0.4% in 3 years time.
• Analysts expect earnings to reach $30.2 million (and earnings per share of $-0.08) by about July 2028, up from $-157.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $266.1 million in earnings, and the most bearish expecting $-205.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.9x on those 2028 earnings, up from -8.3x today. This future PE is greater than the current PE for the US Media industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Altice USA Future Earnings Per Share Growth

Risks

• Increasing competition in the broadband sector, particularly from fixed wireless and other fiber overbuilders, especially in the West, could lead to increased pricing pressure and lower revenue growth.
  
• The decline in residential revenue by 4.6% year-over-year in 2024 and the challenges with penetrating new broadband subscribers due to lower overall connect volumes could negatively impact revenue and subscriber growth.
  
• The company's leverage remains high, with a leverage ratio of 7.3x, which could create challenges in managing interest expenses and accessing additional capital, potentially affecting net margins.
  
• Video revenue is being negatively impacted by changes in consumer preferences and increasing programming costs, which may further strain overall profit margins.
  
• Operational headwinds, such as increased direct costs related to accelerating mobile growth, may pressure overall earnings if not offset by corresponding revenue increases.

Valuation

• The analysts have a consensus price target of $2.883 for Altice USA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.5, and the most bearish reporting a price target of just $1.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.2 billion, earnings will come to $30.2 million, and it would be trading on a PE ratio of 49.9x, assuming you use a discount rate of 11.6%.
• Given the current share price of $2.78, the analyst price target of $2.88 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they 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.