Comcast (CMCSA) reported another good set of quarterly financial results.  Revenues, EBITDA, and free cash flow all at least met Wall Street estimates in 3Q even as the company had preannounced a slowdown in growth of new broadband subscribers.  From a financial perspective, the huge increase in broadband subs during the peak of the pandemic provides much greater financial reward than the small shortfall in broadband subscriber growth.  3Q21 marked the point at which Comcast had reduced debt to the level before the acquisition of Sky.  This is an important milestone as management has been promising to accelerate stock buybacks once financial leverage targets were achieved.

Stock Reaction:  Immediately following the report but before the conference call, CMCSA shares were trading up about 3%.  During the call, when management discussed broadband trends in 4Q21 and beyond, the shares dropped sharply to a loss of as much as 4%.  Now, two days later, the stock is off about 2% from the close before earnings were released.  In our last update, we mentioned that there were likely two issues related to broadband subs but not until 2022.  Management guided 4Q21 subs below the level that had already been reduced in September.  The company also refused to comment on 2022 expectations noting lack of visibility.  The latest commentary has moved the concerns we expected to emerge next year forward.

Earnings Analysis:  Short of the broadband subscriber outlook, Comcast had good results across the board.  Cable is still growing over 10% thanks to the much larger broadband base, a shift to profits in Xfinity Mobile, and continued steady growth in connectivity services to businesses.  The company’s media and entertainment businesses at NBC Universal continue to recover strongly after being crushed during the pandemic.  Advertising, theme park attendance, and Sky’s UK and European TV operations all grew very strongly.  Comcast is continuing to invest heavily in its Peacock streaming services which reduces headline growth at NBC Universal and obscures the underlying organic recovery.

Target Price:  We are sticking with our target price in the low-$60s for Comcast but expect it to take a few quarters before investor sentiment improves and the shares resume an upward trend.  Financial results will remain quite strong and the stock buyback should accelerate sharply to about 10% of the shares outstanding per year.  Unfortunately, the unclear outlook for broadband subscriber growth is dominating the investment narrative.  The big fear is that now much higher penetration of broadband households and increasing fiber-to-the-home investments by telcos means that Comcast’s growth will slow dramatically.  Management notes (we believe correctly) that thus far the slowdown is merely due to COVID impacts on increased penetration and lower churn from less housing moves.  Currently slower growth is coming ahead of a pickup in fiber passings by telcos over the next few years.  Investor fear is driving the terminal value placed on Comcast lower even as financial results continue to grow with almost no impact.  Northlake believes that over the next few quarters, Comcast will prove to investors that broadband remains a growth business.  Greenfield builds and a pickup in housing formation should provide enough room for cable and telcos to co-exist with modest growth.  Comcast will also enjoy continued growth at NBC Universal and Xfinity Mobile.  Today, Comcast shares assume close to no growth.  This is a dire view given the dominant competitive position cable broadband will maintain in most of the country even as telco fiber penetration grows. 

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.