EUR 850.00 For Business Accounts Only

Morningstar | Despite Overpaying for Sky, We Continue to View Comcast as a Premier Telecom Asset

We continue to believe Comcast’s core cable networks provided a significant competitive advantage versus its primary competitors, phone companies like AT&T and Verizon, as high-quality Internet access has become a staple utility in more households. The firm’s market share has steadily expanded in recent years, driving cash flow sharply higher. In short, we believe Comcast has built a solid wide moat firm. Not content to merely return cash to shareholders, however, management has chosen to invest $40 billion, or a bit more than three years’ worth of free cash flow, to acquire Sky, the largest pay television provider in Europe. We expect Sky and NBCU will enhance each other’s competitive position, but Comcast paid a very high price, which we think will limit value creation. We still believe Comcast’s shares are worth $42, though, with the stock modestly undervalued at current prices.

Even with Sky in the fold, the core cable segment remains Comcast’s most important business, accounting for about half of total revenue and an even larger share of cash flow. Over the past five years, we estimate the firm has increased Internet access market share in the areas it serves from about 55% to 62%, with share coming nearly entirely from the phone companies. While that share shift may seem modest, it implies that Comcast’s customer base in a given area is now more than 60% larger on average than its rivals’, up from around 20%. In areas where the phone companies haven’t invested in network upgrades, we suspect the gap is significantly larger still. With a network than can be upgraded at modest incremental cost, we expect Internet access share will continue to shift in Comcast’s favor, enabling the firm to gain additional scale efficiencies.

We expect AT&T and Verizon, in particular, will increasingly turn to fixed-wireless Internet access as 5G wireless technologies emerge. Verizon has taken an early lead in this effort, trialing fixed-wireless service in a handful of markets utilizing pre-5G equipment and very-high frequency spectrum. While this initiative bears careful watching, we’re skeptical that fixed wireless will challenge traditional Internet access offerings on a broad scale anytime soon. We further expect Comcast will have a role to play in the wireless business over the longer term. The firm’s fiber network penetrates deeply into residential areas, providing an opportunity to either build a wireless network or partner closely with an existing carrier. Comcast has already deployed millions of Wi-Fi hotspots across its footprint and has begun offering wireless service to customers through an agreement with Verizon Wireless.

We don’t think NBCUniversal enjoys the same degree of competitive advantages that the core cable business does, but we still believe the segment warrants at least a narrow moat based on intangible assets. Comcast has modeled NBCU on Disney, in our view, investing heavily to create and bolster core content franchises, like Jurassic World and Despicable Me, while building multiple outlets to monetize and reinforce the popularity of this content. These outlets include theatrical distribution, a broadcast network that can reach nearly every household in the U.S., several cable entertainment networks, and theme parks, in addition to content distribution agreements with third parties around the globe. Comcast has also invested in its news and sports capabilities, including long-term Olympics and NFL rights. This real-time content solidifies its position in the traditional cable television bundle and provides increased optionality as television viewing habits evolve.

Sky is the U.K.'s largest pay television operator, with 13 million retail subscribers, equal to about 45% of the households and more than twice the number of cable customers in the country. While we aren’t fond of the long-term potential of satellite television distribution, the U.K. market has unique features that enhance Sky’s competitive position. Sky was early to build critical mass in the pay television market, enabling it to gain exclusive rights to premium content, notably the English Premier League. The firm was also early to recognize the need to own content production, building Sky News and an entertainment studio. Sky claims that more than half of the content viewed on its services comes from its own portfolio. Rolling Sky into the Comcast family promises to further enhance this content position, helping Sky cement its position with customers even as distribution methods change.