The cable industry’s days of flying under Wall Street’s radar with an underappreciated “infrastructure advantage” are over, argues MoffettNathanson analyst Craig Moffett, who downgraded the cable industry, and its leading operator, to “neutral” trading status today.
Comcast, which had been rated “buy,” has tripled in stock value over the past five years, the analyst noted, with cable stocks viewed as a “contrarian purchase,” going against commonly held notions that over-the-top video would crush the industry.
For its part, Charter Communications has seen its stock price quadruple over the same five-year span, with savvy investors climbing beyond the noise “about video cord-cutting and risks to the relatively less important video aggregation layer,” and yielding handsome rewards.
“But as any mountain climber knows, the higher you go, the thinner the air is,” Moffett added.
The analyst believes the market has corrected its undervaluation of the U.S. cable industry, and that gravity is about to pull stock prices back to earth.
“Broadband growth will inevitably slow, and it will likely do so at precisely the same time that video growth rates also come under pressure from OTT substitution,” Moffett said in his Tuesday-morning note. “And while cable operators have the pricing power to offset these headwinds via their broadband business, we believe it is likely that investors will (appropriately) apply a somewhat lower terminal growth rate assumption to a business that is achieving its growth through pricing rather than unit growth.”
The analyst maintained his neutral rating for Charter, as well as his “sell” advisement for Cable One.
“After 10 years, it is getting harder to pretend that the market is somehow missing something,” Moffett added. “The market no longer views cable operators as contrarian investments. Their infrastructure advantage is well understood.”
He said Wall Street is now “too complacent” about cord-cutting.
“After watching operators like Cable One sustain EBITDA even in the face of withering video subscribership declines, many investors have come to conclude that the loss of video simply isn’t all that worrisome.”