A few days after Comcast chief financial officer Mike Cavanagh’s admission that the No. 1 cable operator’s broadband growth trajectory was “a little bit” light in the latter part of August sent cable stocks into a tailspin, some analysts that cover the sector tried to inject some context into the conversation, with most stressing that investors should remember that while broadband growth is expected to slow, it’s still growing.
Cavanagh, speaking at the virtual BofA Media, Communications & Entertainment conference Tuesday, said that Comcast had seen “a little bit of a slowdown” in broadband growth in late August, which sent the stock down 7.3% to $55.59 for the day. Comcast’s slide affected other cable distribution stocks that day. Charter Communications shares closed at $761.86, down about 4%, or $31.21 each on Sept. 14, while Altice USA shares fell 3% (82 cents) to $26.61 and Cable One dipped 4.1% ($81.84 each) to $1,908.16 per share.
Stocks fared a little better in the next two days. Comcast closed at $57.28 on Sept. 16, gaining back about 3% of its losses, while Charter closed at $765.24, Altice USA at $25.94 and Cable One at $1,963.85 per share.
It didn't help that Cavanagh’s Tuesday comments were a little confusing. He basically said at the conference that if Comcast were to add together its Q2 2021 and Q3 2021 broadband additions, they would be about 10% better than its combined Q2 2019 and Q3 2019 additions. That comes after the company had increased its full year guidance during its Q2 earnings call, saying that it expected broadband additions in the mid-teens percentages in 2021.
Cavanagh added that Comcast still expects full year 2021 broadband additions to be ahead of 2019.
In a research note Sept. 15, Bernstein media analyst Peter Supino estimated that the Sept. 14 stock slide cost Comcast about $20.1 billion in equity value, adding that Q3 broadband performance will likely be about 100,000 subscribers behind analysts’ consensus estimates.
Supino pointed out that 100,000 fewer subscriber additions is just a small fraction of Comcast’s total 31.4 million broadband subscribers.
So analysts, who had anticipated a second quarter growth slowdown that didn't come -- Charter Communications also exceeded Q2 expectations and at that time had to redo their estimates -- will have to to rethink them again.
Supino wrote that he discussed the market with several of the largest ISPs, adding those conversations had three common threads -- broadband churn generally remains low and stable, gross additions are below normal and there is no apparent reason for a material shift in Comcast's share of gross adds; and the pandemic has changed the seasonality characteristics of Q2 and Q3.
“With fewer students in residence at colleges, historical models may overestimate 2Q disconnects and 3Q reconnects,” Supino wrote. “With Comcast's geographic diversity and heavier exposure to college towns, we think college schedules are the bigger change factor. This explanation also aligns with the timing of the deviation from plan.”
Barclays Global Research media analyst Kannan Venkateshwar wrote in a Thursday research note that while COVID helped drive big gains in 2020 as the virus forced most Americans to work and learn from home and as cities and towns are beginning to open back up, the pandemic is making visibility for the sector difficult.
“This volatility and lack of visibility over a relatively short time horizon appears to have been driven by a change in connect behavior due to Covid, with weaker back to school connect trends and less seasonal disconnect/connect 2Q/3Q activity,” Venkateshwar wrote. “However, there are other factors such as non-pay disconnect trends which have still not normalized, and with the lapsing of stepped-up unemployment benefits, disconnect moratoriums, and eviction moratoriums, there could be additional factors to consider in Q4.”
Venkateshwar estimated that Comcast would add about 1.37 million broadband customers in 2021, below the 1.8 million it added in 2020 and slightly ahead of the 1.32 million added in 2019. For Charter, which added 2.1 million broadband customers in 2020, the decline will be a little more dramatic -- Venkateshwar estimates it will add 1.37 million customers in 2021, ahead of the 1.28 million added in 2019. Altice USA is expected to add less broadband customers in 2021 (3,700) than in 2019 (7,200). The company added about 134,000 broadband customers in 2020.
The Barclays analyst also expects the downward growth trajectory to continue in 2022. He estimated that Comcast would add 1.1 million broadband customers in 2022 and Charter should add 1.2 million. Altice USA is expected to do a little better in 2022 with 6,500 broadband additions, but they will still be below 2019 adds of 7,200.
