Comcast Is In Trouble

Apr. 9.13 | About: Comcast Corporation (CMCSA)

Going by the numbers, Comcast (NASDAQ:CMCSA) seems a great company at first blush. With a P/E of less than 20 and a decent debt to equity ratio of 0.81, it would seem a company destined to see nothing but growth in the coming years. Comcast has further strengthened its share price and investor sentiment by growing its modest dividend by 20% and by announcing a share repurchase of $2 billion.

The company's strong balance sheet has come at a price, however. Comcast's CFO has rejected taking on more debt to fund expansion. Citing $40 billion in debt as too much, he has refused to heed calls by investors to acquire small but profitable companies. Typically, I would hail this conservative approach, as I strongly dislike companies that take on vast amounts of debt in the hopes they can repay it all quickly. However, in this scenario, Comcast is in a position that has a weak future outlook, and it needs to do something about it. Such a conservative approach in this situation will prove to be Comcast's downfall.

Comcast faces a nigh-impossible task in the coming years: taking on Google (NASDAQ:GOOG), DirectTV (DTV), Dish Network (NASDAQ:DISH), Netflix (NASDAQ:NFLX), and Amazon (NASDAQ:AMZN) single-handedly. It simply cannot win in both the ISP and entertainment markets against such strong competitors. I believe Comcast will lose ground in both of them in small part due to the CFO's conservative approach, but mostly due to poor pricing and even worse customer service.

Weak future as an ISP

A friend and I jokingly blame all of the problems in the world on two things: Comcast and the devil. We're not the only ones who despise Comcast either; Comcast suffers from abysmal customer satisfaction ratings. The only reason Comcast retains internet customers is because it essentially has a monopoly on high-speed internet access in many areas. When the choice is between dial-up and Comcast, customers who need high-speed access begrudgingly choose Comcast. I am fortunate enough to have CenturyLink (NYSE:CTL) in my area to provide service, otherwise I would be using Comcast.

Unfortunately, or fortunately, depending on who you ask, the Supreme Court has struck down an antitrust lawsuit against Comcast on the basis that "the class action was improperly certified under Rule 23(b)(3)." Comcast's previous acquisitions continues to pay its dividends.

However, Comcast does finally face some competition that it cannot simply buy out. Google (GOOG) Fiber is spreading, and it offers 7 years of free internet after a $300 installation fee, which works out to less than $3.60 a month. Google will also offer fiber internet that is 100x faster than Comcast's cable internet for $70 a month. This pincer tactic of scooping up both the frugal consumer and the performance-driven consumer has already proven effective in Kansas City. So effective, in fact, that Google is now beginning to install fiber in Austin, Texas as well.

As Google continues to expand its services, Comcast will feel immense pressure in the form of lost customers. This expansion will take several years, though. At the current pace, it will be close to a decade before Google Fiber even reaches half the major cities in America. Once Google fiber reaches this point, it will be far too late for Comcast to attempt to copy Google's model. I also doubt investors will be happy with the profits garnered from charging less than $10 a month for internet access just to compete with Google.

Increased competition in entertainment

I have never paid for cable TV in my life, and never will. Part of that is because I don't watch all that much TV, as I use a common substitute: video games. I'm hardly the only one amongst my generation who is cord cutting. For the most part, video games have already made their dent in the cable TV market, but as the Millennials get older, I think we will see a much lower cable purchase rate than what we see in the Baby Boomers and Gen X. Citing demographic trends would make one think that Comcast will not face any headwinds for at least a few years. However, the decline in cable subscriptions is already apparent, with a loss of 2 million subscribers last year.

A bigger reason many people, especially those my age, opt not to get cable is because cable TV has become far too expensive. Shockingly, at $60 a month, using competitors like Amazon (AMZN) or Netflix (NFLX) at less than $10 per month make a lot more sense, especially for casual TV viewers like myself. Comcast may attract some customers with a $30 a month initial offer, but people tend to notice when their cable costs double.

As I mentioned before, Comcast is not known for its customer satisfaction ratings (and that's putting it lightly). This has caused others who can afford the cost of premium TV service to switch to competitors like DirecTV (DTV) or Dish Network (DISH) in order to get better service. Overall, while earnings are robust for Comcast's cable division, it does not look as though it will be able to continue its dominance in TV entertainment.

Voice cannot save Comcast

Half of U.S. households don't even use their landline if they even have one. This number is on the rise and shows no signs of stopping. Using a cell-phone only has become increasingly common, as a cell fills all the needs of a land line except in the most extreme situations (mass power outages, for example).

Businesses may still use landlines, but the profitability is simply insufficient in this market. AT&T (NYSE:T) and Verizon (NYSE:VZ) are trying to get away from providing landline service, and for good reason. This doesn't mean Comcast is in the clear in this market, as there is still competition in the form of VoIP services such as Skype and Vonage (NYSE:VG). Once again, Comcast's pricing is somewhere in lunatic territory when compared to its competitors. While this pricing has led to incredible profitability over the last few years, this will prove to be Comcast's downfall.

In this economic environment where everyone is trying to cut costs, we will continue to see the trend of land-line cuts. Amongst those who continue to retain their landline, we will continue to see a switch to lower-cost providers, as landlines continue to become more of a convenience / emergency service rather than a primary communication service.

To short, or not to short, that is the question

I am obviously bearish on Comcast, but it may be too soon to take a short position. Comcast is still earning quite a lot of money, and its share repurchases will support the current price levels, or even drive them higher. It will be a few years before Netflix and Google can take large chunks of Comcast's market share, as well. Finally, it will also take years before demographic shifts in the U.S. cause large headwinds to the cable TV market.

At the same time, some headwinds, such as declining subscriptions, are already visible, and may negatively affect investor sentiment. Analysts are expecting an EPS of $0.51, as opposed to $0.45 for the same quarter last year. I have my doubts as to whether this ~10%+ growth in earnings can be met by a company with decaying fundamentals.

It may be worthwhile to short the stock now, before the company's earnings report on May 1st. However, this is a significantly riskier proposition than shorting the stock in a year or two, when Comcast's loss in market share will be more pronounced. I enjoy risk, however, so I will be shorting Comcast before its next earnings report. The decline in Comcast's subscribers, without any cost-cutting measures happening concurrently, indicates to me that earnings will be difficult for Comcast to meet.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CMCSA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.