Though Comcast Corporation (NASDAQ:CMCSA) is a rather well diversified company, there was really only one metric that current and would-be Comcast stock owners could think about when the company unveiled its third quarter results on Thursday morning: the number of cable subscribers it lost due to an ever-accelerating cord-cutting movement.
There’s good reason for the obsession, mind you. Although the company owns theme parks, makes movies, operates the NBC network and more, its cable television service is its biggest source of revenue as well as the biggest contributor to the bottom line. If that arm is moving backwards (and it is) then the company as a whole is moving backwards.
The question is, just how important is Comcast’s cable communications business? The answer, very. One simple chart puts the alarming matter in perspective.
Putting Cable in Perspective
For the quarter ending in September, Comcast Corporation turned $20.98 billion worth of revenue into a profit of 52 cents per share. The bottom line was better than the 50 cents per share of CMCSA analysts were expecting, though the top line just fell short of revenue estimates of $21.04 billion. The company earned 56 cents per share of Comcast stock on sales of $21.32 billion in the same quarter a year earlier.
The big news: The company ‘only’ lost 125,000 video (cable) customers, versus expectations for a decline of 136,000.
It could have been worse. Comcast stock was down 10% from the end of August heading into Thursday morning’s earnings report, against a backdrop of similar video subscriber losses from Charter Communications, Inc. (NASDAQ:CHTR). AT&T Inc. (NYSE:T) had already dropped the same news about its waning video business earlier in the month.
All things considered, the fact that CMCSA shares were only barely in the red on Thursday was a relative victory.
All the same, more than anything else, the ramped-up cord cutting effort stemming from the availability of options like Netflix, Inc. (NASDAQ:NFLX) or DirecTV from AT&T is bad news for Comcast.
How bad? Take a look at the company’s historical revenue by division, and EBITDA by division. It dwarfs everything else.
That’s WHY all eyes are on that measurement every quarter.
For the record, not all of the cable communication segment’s revenue and operating profit stems from video services. This arm also includes internet service and phone service. Video makes up about 44% of the cable communication arm’s though, and the cable communication arm accounts for 62% of Comcast’s total business. That means cable television is about 30% of Comcast’s revenue mix, by far the most meaningful source of revenue for the organization.
It also drives a comparable portion of the company’s net income, which again is why it’s such a hot button for current and potential Comcast stock owners.
Comcast Stock Price Forecast
As was noted, all things considered, it could have been worse. Comcast is losing cable customers, but not at a breakneck speed. That side of the business is still plenty profitable, even if non-video units are doing more of the heavy-lifting than they have in the past.
On the flipside, not only are matters apt to get worse before they get better, they’re apt to start getting worse at a much faster clip.
As serious as the cord-cutting phenomenon has been through 2016, it’s been unfurling at an even faster rate in 2017 despite the seeming maturity of the over-the-television industry. Industry research outfit eMarketer recently noted that after 16.7 million U.S. consumers cancelled their cable, satellite of telco-TV service as of the end of last year, another 5.5 million will pull that plug this year. That’s a 33% increase from 2016’s tally, representing the biggest surge witnessed yet. Conversely, the number of cable television subscribers will fall 2.4%, and by 2021 the country will have almost 10% fewer cable TV subscribers than it has right now.
The outgoing tide will not only prove to be a revenue problem for Comcast, it could prove to be an even bigger EBITDA problem as cable companies lose their scale and have to spend more and/or charge less to retain what customers they can. Comcast, which is so heavily reliant on cable television, will have a tough time offsetting that headwind with other revenue-bearing businesses.
With that as the backdrop, it’s tough to come up with any sort of Comcast stock price forecast that’s bullish.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
