Cable broadband subscriber growth in 2021 will not match the gangbuster numbers seen in 2020, according to industry analysts. But they still see reasons to remain bullish about Comcast Corp. and Charter Communications Inc., the two largest cable operators in the U.S.
While Comcast recently reported a record fourth quarter in terms of high-speed internet additions, Charter closed out 2020 with a year-over-year decline in quarterly residential broadband customer additions. Despite the divergent performances, analysts remain optimistic about both companies' ability to drive margin growth going forward.
"The outlook for cable is extremely strong with the ability to take share and ARPU [average revenue per user] a powerful combination," said Jeffrey Wlodarczak, Pivotal Research Group's principal and senior analyst of entertainment and interactive subscription services, in a Jan. 28 research report about Comcast specifically.
As part of his positive investment theses on both Comcast and Charter, Wlodarczak believes high-margin broadband subscriber gains will "overwhelm" the declines from the companies' pay TV business.
Bulls over bears
MoffettNathanson analyst Craig Moffett wrote in a Jan. 28 research report that he has heard three bear cases for cable heading into 2021.
For the first case — that a Democratic-led administration will regulate broadband pricing — Moffett says he is "not concerned about the regulatory thesis."
While the Federal Communications Commission is currently split 2-2 along party lines, President Joe Biden is expected to nominate a third Democratic member to the commission soon. Industry observers believe a Democratic-led FCC will likely reclassify broadband as a Title II telecommunications service, restoring more regulatory authority to the agency over broadband service providers, including the ability to impose net neutrality rules. Despite the increased regulatory authority, most analysts do not expect a Democratic-led agency to pursue rate regulation.
For the second bear case Moffett listed — that fixed wireless broadband will make a comeback — Moffett says he is "not particularly worried about the threat to cable."
The third case, which is that broadband growth will decelerate in 2021, Moffett says is "almost certainly true." But he noted it is not overly worrying.
"We all know that broadband growth will decelerate in 2021. It can't stay at this pace," said Moffett. "But with margins continuing to rise faster than expected, and with capital intensity continuing to fall, it isn't as clear that EBITDA growth, or free cash flow growth, will decelerate," he added.
Comcast
For Comcast in particular, Moffett said the company is generating strong performances in other parts of its cable business, beyond broadband. For instance, Moffett noted that local cable advertising, business services and wireless growth were all bright spots.
Wlodarczak similarly forecasts "a solid '21 result and a significant acceleration in '22" for Comcast, boosted by a normalizing economy, continue broadband growth and a maturing wireless business.
Comcast ended 2020 with more than 2.8 million wireless lines. It reported 246,000 net wireless line additions in the fourth quarter of 2020, slightly down from 261,000 in the year-ago period.
Charter
Turning to Charter, Wlodarczak said that while executives are forecasting 2021 will be similar to 2019 in terms of performance, "the set-up for ’22 is unquestionably strong." He noted the "continued positive effects" of an increasing share of revenue from high-margin broadband subscribers and "wireless swapping from material losses to gains."
As of year-end, Charter served a total of 2.4 million mobile lines, with 1.3 million mobile lines added in 2020 versus 948,000 added in 2019.
Wlodarczak also cited a return of political advertising, a continued rebound in small- and medium-sized business customers and likely economic normalization as positive factors for Charter.
Analysts also continue to believe Charter's participation in the Federal Communications Commission's Rural Digital Opportunity Fund, which targets financial support to help deploy high-speed broadband networks in parts of rural America that do not have fixed broadband service of 25 Mbps for downloads and 3 Mbps for uploads, will be a boon for the company.
Charter announced on Feb. 1 that it expects to invest about $5 billion to expand its high-speed broadband coverage to more than 1 million unserved U.S. customer locations.
The investment includes $1.2 billion of support that Charter secured in the FCC's RDOF Phase I auction.
In a Feb. 1 note to investors, Jonathan Chaplin — who leads the U.S. communications services research team for New Street Research — said that one implication of Charter's announcement is that the internal rate of return for the RDOF project could be modestly lower than expected, but still attractive.
"The total capital outlay is less than we thought before the auction, which should place less pressure on free cash flow for the duration of the build," added Chaplin.
In the bullpen
While Moffett noted that Charter's business services growth has been suppressed by the pandemic and other factors, he expects it to recover in 2021 and provide "a nice tailwind to growth rates.”
Additionally, Moffett says he expects cable advertising to recover in the first half of 2021 as well.
Ultimately, he suggested the outlook for the stock will boil down to which factors are prioritized.
"What matters more, slowing broadband growth, or explosive growth in free cash flow per share? We're still in the bull camp," he said.
