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March 19, 2007

Upside From Comcast's Internet Advertising Business

In what should be good news for Comcast (CMCSA/K), the Wall Street Journal reported in its Weekend Edition that Comcast is unhappy with its current relationship with Google (GOOG). Under an agreement that expires at year end, Google provides search for Comcast.net. According to the Journal, Comcast is actively shopping its internet search relationship with the possibility that Microsoft (MSFT) or Yahoo (YHOO) could displace Google. The Journal also indicates Comcast is looking to sell 80% of its display advertising inventory to Microsoft, Yahoo, or the AOL division of Time Warner (TWX).

Given the battle for search and display inventory Comcast stands to see a big boost in its annual take from these sources. According in the Journal, in search alone, Comcast is currently receiving about $70 million per year from Google. Comcast believes that they should be receiving at least $100 million. Comcast.net is the 17th most trafficked site on the net and provides around 7-8% of all of Google's searches.....

I suspect that Comcast will get a deal somewhat similar to the Google deal with MySpace, which is owned by News Corp (NWS), where Google guaranteed MySpace a minimum annual revenue stream. Given Comcast's growing strength as a broadband provider (11 million subscribers now, 13 million by year end, 70% of which use Comcast.net as their home page), it would seem that a doubling or more in Comcast's revenue from search and display advertising is in store in 2008. From this higher base, Comcast should grow this revenue stream at a nice premium to overall internet advertising growth as the base of broadband subscribers should continue to grow.

I made a few calls to analysts early last week when I first learned that the Comcast-Google deal was up at year end. As far as I can tell, analysts do not have a one-time boost in revenue and EBITDA (flow through should be close to 100%) from search and display advertising in their models for Comcast in 2008. Comcast is expected to have about $12 billion in EBITDA in 2007 and grow by about $1.3 billion in 2008 or 11-12%. An additional $100 million (?) pushes the EBITDA growth rate up more than 80 basis points. Not huge but not chump change.

I think it is an excellent time to be buying Comcast. The stock has pulled back from $30 to $25.50 since mid-January. Today's news should help sentiment. Additionally, CEO Brian Roberts recently indicated at a Wall Street conference that 1Q07 is shaping up better than they expected when they gave guidance in mid-January. Last year, Comcast reported 1Q results on April 27th. I think being long prior to that report is a good idea.

Posted by Steve Birenberg at March 19, 2007 12:45 PM in Comcast/Cable TV