As the cord cutting mega-trend has swept through the global consumer economy over the past several years, there have been many winners and losers. On the winning side, you have all the streaming services which are gaining subscribers hand over fist thanks to the linear to internet TV pivot. Think Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and now Disney (NYSE:DIS).
On the losing side, you have all the traditional telecom and information technology companies whose various legacy voice and video services have increasingly become antiquated in an internet dominated world. At the top of this list of cord-cutting losers is communications IT company CenturyLink (NYSE:CTL). Over the past five years, CTL stock has dropped by more than 60%.
The unfortunate reality for CTL shareholders is that there is no rebound coming soon for CTL stock. Instead, shares will like remain lower for longer.
Why? Because the cord cutting mega-trend which has killed CTL stock over the past few years won’t let up anytime soon. It may actually get worse. At the same time, CenturyLink lacks sufficient firepower elsewhere to offset persistent cord-cutting weakness. Ultimately, revenues and profits likely won’t go anywhere anytime soon.
Neither will CTL stock.
The investment implication? Stay away from this falling knife.
CenturyLink Is Plagued by Secular Headwinds
CenturyLink is staring eye-to-eye with some major secular headwinds that won’t ease anytime soon.
Namely, consumers are pivoting in bulk from the linear to the internet channel. This includes a pivot from landline phones to smartphones. Back in the early 2000s, everyone had a landline. Today, 50% of adults only have a cellphone.
That’s a big drop. But, 50% still have landlines, and in the current era, there really isn’t a compelling reason for anyone to have a landline. As such, that number will likely drop to zero over time, implying lots of pain still to come for linear voice service providers.
It also includes a pivot from cable television to internet television. Again, back in the early 2000s, essentially everyone subscribed to pay TV. Today, less than 80% do. That number is rapidly falling. It’s down six points over the past five years alone.
It will continue to drop — and perhaps more rapidly — as Disney, AT&T (NYSE:T), and others jump more aggressively into the internet TV channel during the 2020s. In the big picture, then, the challenges for linear video service providers are just beginning.
None of this is good news for CenturyLink. Over the past several years, steady broadband growth hasn’t been enough to offset persistent weakness in the voice and video segments. Revenues, profits, and the stock price have all consequently been stuck in a secular decline. The voice and video headwinds aren’t going away. They may only get worse.
As they do, CenturyLink’s revenue and profit trends won’t improve. So long as they don’t improve, CTL stock won’t rebound.
CenturyLink Stock Likely Won’t Go Anywhere
The numbers underlying CTL stock aren’t good and they broadly imply that shares won’t move higher anytime soon.
Revenues are dropping at a steady 3% to 5% rate. Profit margins are improving somewhat, but this profit improvement is only partially offsetting the revenue declines. Profits are still dropping year-over-year. At best, over the next few years, improving margins fully offset persistent revenue weakness, and result in flat profits.
Earnings per share this year, next year, and the following year are all expected to come in around $1.35. At best, some extraneous items and buybacks push EPS towards $1.50 by 2025. Also, at best, CTL stock gets a market-average 16-times forward earnings multiple.
That combination of a 16-forward multiple and $1.50 in 2025 EPS implies a 2024 price target for CTL stock of $24. Discounted back by 10% per year, that equates to a 2019 price target of about $15. Thus, in a best-case scenario, CTL stock is worth exactly where it’s trading today.
Bottom Line on CTL Stock
CTL stock has been hit hard by macro cord-cutting headwinds over the past few years. These headwinds won’t ease anytime soon. Instead, they may actually get worse. If they do, then CenturyLink’s revenues and profit trends will remain depressed, and that will result in CTL stock remaining similarly depressed.
As of this writing, Luke Lango was long NFLX and T.