I’ve been recommending Comcast (NASDAQ:CMCSA) for this entire year. After Thursday morning’s earnings report, I like CMCSA stock even more.
The market, however, saw it differently. Comcast’s stock actually declined 0.5% in trading Thursday.
It may have been that a rally into the release preempted some of the potential optimism. Comcast stock had bounced about 16% from late June lows. That rally came despite a rising number of cases of the novel coronavirus, a spike which, in theory, should add further pressure to the company’s theme parks business.
But from here, earnings were strong enough to suggest that CMCSA stock is just taking a breather. The report was easily good enough to move the stock higher. Just because the move didn’t happen on Thursday doesn’t mean it won’t happen soon.
A Winner or a Loser?
The simple bull case for Comcast stock is that it’s a pandemic winner, not a loser. That case seems somewhat counterintuitive.
After all, we’ve seen plenty of evidence that “stay at home” orders accelerated cord-cutting and adoption of streaming services. For instance, Netflix (NASDAQ:NFLX), posted blowout subscriber numbers in both the first and second quarters.
That in turn would seem to be a significant negative for Comcast’s video business. The company closed 2019 with over 20 million video subscribers, according to the company’s Form 10-K filed with the U.S. Securities and Exchange Commission. It lost more than 2% of those subscribers in the first quarter alone.
Meanwhile, Comcast’s Universal theme parks have taken a hit. So, too, has its Filmed Entertainment business, as theaters remain closed worldwide. And cord-cutting is pressuring the NBCUniversal unit.
But the good news here outweighs the bad. Yes, Comcast is losing video subscribers — but those subscribers are not all that profitable. As I’ve noted before, thanks in part to onerous rights fees for live sports, rivals Charter Communications (NASDAQ:CHTR) and Cable One (NYSE:CABO) have given up chasing those subscribers at all.
Worth noting: both of those stocks are up in 2020, with CHTR gaining 16% and CABO 19%.
Those companies admittedly don’t have film or theme park businesses. But those two segments in 2019 combined for less than 10% of total profit.
Meanwhile, the pandemic has accelerated several trends that make Comcast’s broadband business even more valuable. Video streaming? It requires broadband. Videoconferencing via Zoom Video (NASDAQ:ZM)? The same. And with the Peacock streaming service offsetting pressure on NBCUniversal, Comcast seems exceedingly well-positioned for the “new normal.”
Earnings Support the Bull Case
From here, Comcast’s second quarter seems to support that bull case. It’s not just that consolidated results topped expectations, though they did. Despite the pandemic and investments behind Peacock, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) declined just 9% year-over-year.
Meanwhile, Comcast actually added 217,000 total subscribers. The high-speed internet business had its best second quarter subscriber figure in 13 years. There’s proof of the value of Comcast’s core franchise.
In Cable Communications as a whole (which includes both video and Internet customers), adjusted EBITDA actually increased 5.5% year-over-year despite a decline in revenue. That’s proof that a) Comcast can manage video declines and b) that its pricing power is likely going to grow.
Elsewhere, profits actually increased in the Cable Networks, Broadcast Television and even the Filmed Entertainment units.
And Peacock got out of the gate strong, with 10 million subscribers. Chief executive officer Brian Roberts said the early results were ahead of his company’s expectations, and they were likely ahead of the market’s as well.
This was a good quarter for Comcast. And it’s a quarter that shows that the quickly changing world is a positive for Comcast, not a negative as investors feared.
Long-Term Upside in CMCSA Stock
But even with the recent rally, Comcast’s stock isn’t treated that way. Shares are down almost 3% so far this year, and sit 8.5% off January highs.
I see little reason why Comcast can’t reach new all-time highs. In fact, I would argue it should get there quickly. That in turn suggests at least 10% appreciation — with a 2%-plus dividend yield on top.
That kind of upside might not seem Earth-shattering. But for a defensive name in a market near all-time highs, it’s certainly attractive. And over the long haul, as data-consuming trends accelerate, so too will Comcast’s pricing power and profits.
Again, Q2 strongly supports that long-term case. That’s what mattered on Thursday, not just a bit of variance relative to Wall Street expectations. I expect investors soon will figure that out — and CMCSA stock will resume its recent rally.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.