Comcast (NASDAQ:CMCSA) has been one of the victims of the market-wide sell-off over the past few weeks. Indeed, Comcast stock has declined some 8% from its January highs.
It’s a decline that lacks logic for a number of reasons. To begin with, I see this broader sell-off as an opportunity. I believe the coming decade will be what I’ve coined the “Roaring 2020s” for both the market and the U.S. economy. Fears — and occasionally panic — about the short-term impact of the coronavirus from China hardly change that long-term case.
Meanwhile, even for investors who see reason for near-term worry, Comcast stock is an illogical candidate for selling. The story here simply isn’t any different than it was seven weeks ago. The only thing that’s changed is that investors can own one of the world’s telecommunications leaders for a more attractive price.
Unjustified Short-Term Fears
There are investors out there who believe the decline in U.S. stocks was justified and perhaps even necessary. The new virus from China will have an impact on the global supply chain. Sectors like travel will see plunging short-term demand that will impact earnings.
Meanwhile, at January levels, U.S. stocks certainly weren’t cheap. We’ve seen frothy trading in some sectors of the market. We’ve seen growth stocks, in particular, receive historically high multiples.
But assume those points are both valid (and there is some validity on both fronts). Why does either really matter to Comcast stock?
The only part of the Comcast business impacted by the coronavirus are its theme park (which includes a park in Japan) and filmed entertainment operations. But in 2019, theme parks generated just 7% of the company’s Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), according to Comcast’s Form 10-K filed with the U.S. Securities and Exchange Commission.
Filmed Entertainment drove less than 2% of profit. A chunk of that came from content licensing, not from theatrical revenues.
This is not a business with any real, negative, exposure to changing short-term consumer behavior. If anything, stay-at-home consumers might spend more time using the company’s telecommunications products.
That’s the business that matters. The Cable Communications segment (comprised of both cable and Internet services) drives over two-thirds of profits. It might get some help in this environment. Comcast customers may well delay or reverse decisions to “cut the cord.” They could upgrade their Internet to improve their streaming experience.
There are companies out there that will struggle in the coming months. Comcast is not one of them.
Expensive Stocks Struggle
Other investors might see this market-wide pullback as a result of valuations that simply ran too far.
I’m not one of those investors. I’m happy to pay up for companies with massive growth opportunities, a key reason I’ve recommended the likes of Shopify (NYSE:SHOP) and Tesla (NASDAQ:TSLA) for years now.
Obviously, there are overvalued stocks in this market, as there are in pretty much any market. But I don’t believe the ever-present skeptics who have been calling this bull market a “bubble” for years. There are companies out there literally transforming the worldwide economy, and their stock prices should be high.
Regardless, that argument obviously doesn’t apply to Comcast stock. It trades at just 13x 2020 consensus earnings per share estimates. At January highs, the multiple was still below 16x.
That’s a reasonable valuation on its face. And it’s particularly attractive in the context of the sector. Notably, rival Charter Communications (NASDAQ:CHTR) trades at a multiple nearly twice as high looking to next year’s earnings.
Cord-Cutting and Comcast Stock
Looking beyond recent trading, there’s a reason why investors might avoid Comcast stock: its exposure to cord-cutting.
After all, the shift by consumers from legacy cable companies to streaming services can pressure Comcast twice. It loses revenue from cable subscriptions. But it also loses viewership for its cable networks like USA Network and E!.
That pressure, however, should be manageable. The Cable Networks business likely will shrink, but slowly. Profits were actually flat in 2019 year-over-year, and accounted for just 13% of total earnings.
Video did drive 38% of total Cable Communications segment revenue last year. But there, too, declines should be modest: video revenues fell less than 1% in 2019. More importantly, cable subscribers are lower-margin, owing to the affiliation fees Comcast has to pay to content providers. Losing cable subscribers will have less of an impact on profits than some investors might think.
Meanwhile, cord-cutting also will benefit the Internet business. A U.S. consumer almost can’t live without the Internet in this day and age. That gives Comcast tremendous pricing power. Increased bandwidth demand will strengthen that power and improve the value delivered to subscribers.
There will be short-term disruption as cable subscribers exit. But from a long-term perspective, Comcast will be the gateway to the Internet for millions of Americans. As with the market as a whole right now, investors should focus on those long-term positives, and past the temporary worries.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.