Comcast: Will This Growth Ride Continue?

Oct.29.13 | About: Comcast Corporation (CMCSA)

Comcast (CMCSA) recently expanded its agreement with CBS Corp (CBS) in order to increase CBS's content on Comcast's online media streaming services such as Xfinity Streampix and Xfinity On Demand, which comprise Comcast's Xfinity TV. As popular TV shows and movies always have high demand from customers, this is one source that will help attract and retain customers. The entertainment companies are trying their best to bring in more content.

Companies expanding their partnership

In 2010, Comcast and CBS signed a 10-year agreement allowing Comcast to carry programming through its television service. Recently, Comcast announced that the two companies are expanding their partnership by increasing CBS content, which is offered on both Comcast's Xfinity Streampix and Xfinity On Demand. This will give Comcast's Xfinity TV customers an opportunity to view CBS's popular shows at their convenience.

Under a separate pact, CBS will offer all previous shows of seasons of its popular show "The Good Wife" on Xfinity Streampix, a subscription based on-demand video streaming service that costs $4.99 per month. CBS will also offer all previous seasons of the WB's hit show "Charmed" and more current prime time CBS TV shows such as "2 Broke Girls," "Person of Interest" and "The Mentalist" for free through its Xfinity "On Demand" service and on its online streaming website. This will give viewers an opportunity to watch previous seasons and stay connected with current seasons. Along with CBS content, Comcast also offers prime time shows of Discovery, Disney, CNN and Comedy Central. Increased CBS content will be an addition to Comcast's library of content, which will include all past seasons of popular shows as well as a collection of classic and hit movies. This can help Comcast attract more customers opting for Comcast's Xfinity services.

Comcast generates maximum revenue through its video division. Over the past few quarters, Comcast has reported revenue growth between 2.7% to 3.7%. We believe more customers will turn to Comcast's Xfinity platform to view their favorite TV shows, if the company continues to expand its collection of both current and past popular TV shows. This will be the best opportunity for Comcast to monetize on increasing customers and generate high revenue through its video division. With this, we assume the video division will achieve at least an average growth of 3%, generating revenue of $5.33 billion in the coming quarter, higher than second quarter revenue of $5.17 billion this year. Comcast currently has more than 22 million video subscribers in the U.S., and the expansion of partnerships can result in gaining more subscribers in the coming quarters.

The gigabyte fever

Comcast will be launching a new Xfinity Wi-Fi network in Utah by installing more than 1,000 Wi-Fi hotspots. The company has already installed and activated around 300 hotspots in Kansas City and more than 1,000 Xfinity Wi-Fi network hotspots in Ogden, Salt Lake City and Provo.

This will allow its Xfinity Internet customers to access fast wireless Internet service for free. The hotspots will be also available to non-Comcast customers for $2.95 an hour and up to $19.95 for a week-long pass. Installation of the extended network service includes areas such as Sugar House and Temple Square in Salt Lake City and University Mall in Orem. Over the coming months, the company looks forward to rolling out more Wi-Fi hotspots in Utah, especially in Salt Lake City, as it is the state's capital and a populated area. Comcast can generate revenue by selling its Internet service to non-subscribers.

Coincidentally, Comcast's Wi-Fi expansion in Kansas City and Utah faces direct competition from Google's (GOOG) "Google Fiber" wireless broadband network. Google Fiber has already launched its 1 gigabyte, or GB, per second service in Kansas City and is now looking forward to expand in Provo. The company offers 1GB Google Fiber Internet service packages for $70 per month in Kansas and the same will be offered in Provo. Provo residents will be eligible for this service beginning in January next year.

Comcast already has a wide service network in Utah County at many of the busiest places in Provo, such as Provo Towne Center, Utah Valley Regional Medical Center, University Mall, City Center Park in Provo, etc. Comcast offers a package with speed of 250 megabit per second, or Mbit/s, downstream and 50 Mbit/s upstream in Provo for $70 per month.

Even though Comcast offers slower speed for a similar price compared to Google Fiber, it is an incumbent cable provider in Utah. Comcast has a wider coverage area compared to Google Fiber, which makes Comcast comparatively stronger than Google Fiber. For now, Google Fiber doesn't pose a threat to Comcast, but it may face tough competition if Google enters other markets in the future.

Conclusion

As discussed above, we expect the two fundamentals to bring meaningful growth for Comcast over the coming quarters. The company can benefit from the expanded partnership with CBS to offer more CBS content. CBS's popular shows are a key attraction for subscribers and thus help Comcast retain its existing subscribers and attract new subscribers. As Internet usage through mobile devices increases, we believe a large number of customers will use the Wi-Fi network expansion in the popular and busiest areas of Utah. If we compare PEG ratios, Comcast has a lower PEG ratio of 1.01 compared to Google's 1.40. This means Comcast is undervalued, which indicates future growth potential, making it an attractive option for investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.