Buy Time Warner, Netflix Isn’t Slaughtering Cable TV (TWC, NFLX)


Digital video behemoth Netflix (NFLX) fell 7% on Monday on the heels of a downgrade based on concerns of slowing growth in the U.S. That downgrade probably has a great deal to do with the setback for NFLX, but its not the only thing gumming up the works for Netflix CEO Ted Sarandos.

Buy Time Warner, Netflix Isn't Slaughtering Cable TV (TWC, NFLX) At least some of that pullback, however, may quietly stem from the fact that Time Warner Cable (TWC) — long pressured by the likes of alternatives TV venues like Netflix and a respectable selection of airwave broadcasts (which are free) — somehow managed to do the unthinkable last year by adding a net total of 32,000 cable television subscribers.

Is the most painful phase of cord cutting mania finally behind cable TV providers?

It may well be.

Numbers Don’t Lie

Had Baird Equity Research analysts William Power and Steven Beckert not detailed the rationale for downgrading NFLX to only a neutral stance, the news from Time Warner would have almost been dismissible.

In light of the double dose of data, though, one has to wonder if the cord cutting pendulum is nearing the end of a major swing.

The data in question from Beckert and Power points out that the number of U.S. Netflix subscribers (as a percentage of the country’s total number of broadband subscribers) fell from 47% in the third quarter to 46% in the fourth quarter.

To be clear, Netflix almost certainly added new U.S. members last quarter — 880,000 newcomers signed up in Q3, and the company at one point said it expected 1.65 million new U.S. subscribers in the quarter ending last month.

Baird’s data, however, implies the number of new broadband subscribers — subscribers that often bundle a cable television package with their high-speed Internet services — is growing at a faster pace. For perspective, Time Warner, which serves less than a third of broadband subscribers in the U.S., added one million high-speed Internet subscribers last year.

In other words, Netflix isn’t have too much luck poaching new Time Warner broadband subscribers.

The Shift Makes Sense

As the cliche goes, nothing lasts forever. Granted, many corporate trends can end with a spectacular disaster as easily as they can end with a reversal of fortune.

In this case, the manic phase of the cord cutting seems to be slowing down with Time Warner mostly intact, finally poised to start fighting a better fight against indirect rivals.

And it’s the aforementioned numbers (which are admittedly not earth-shattering … yet) that underscore several other data points that have surfaced in just the past few months that send the same message.

One of those data points came from television industry research outfit TDG, which found that in 2015 only 1.4% of cable television subscribers definitely planned on canceling their pay TV service within the next six months, down from 2.9% in 2014.

So where’s the light at the end of the cable television tunnel coming from? Viewers, who are watching more of it.

The reason isn’t perfectly clear or quantifiable, but a growing disinterest in cable TV — as measured by a net decline in the number of minutes the average person watches per day — has been improving since early 2015 after turning negative in 2014.

The reasons for the uptick in cable television watching isn’t crystal clear, but the turnaround does loosely coincide with an effort to put more compelling programming on the air, and at least a more tempered level of advertising exposure.

Time Warner itself recently made a point of cutting back on the number of ads it shows — which isn’t expected to be a major drag on revenue or earnings.

Bottom Line for Time Warner

There’s still work to be done to stave off further cord cutting, not just by Time Warner Cable but by all cable television providers.

It can be done, though, and the equilibrium between cable TV and on-demand alternatives like Netflix is closer at hand than many investors realize. All of a sudden a hopeless Time Warner is a compelling risk-adjusted possibility.

The point is, current and would-be owners of TWC stock can rest a little easier.

Now the company just needs to start explaining how it’s going to beef up earnings and whittle down that forward-looking price-earnings of 23.8 that TWC stock currently sports.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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