October21,2019 BARRON’S 21
“Everyone
seems to be
setting this up
to be an us-
versus-them
battle with
Netflix. We
don’t see it
that way
at all.”
BOB IGER, WALT
DISNEY CEO
tech utilities. But Comcast has lagged behind its
cable peers because its television production as-
sets at NBC and Sky add uncertainty. Its shares
trade for a reasonable 14 times forward earnings
estimates.
In streaming, the company’s Peacock service,
which will begin next April with shows such as
Parks and Recreation,Battlestar Galactica, and
a rebooted Punky Brewster, isn’t an obvious
threat to Netflix or Disney. But Comcast has
wisely chosen a “freemium” model for it. That will
help with churn, a big risk to streamers, if cus-
tomers hop from service to service and binge on
their favorite shows.
Sky offers English Premier League soccer,
news, and scripted content. More important is its
position in over-the-top TV distribution in Europe
with Now TV.
Comcast’s cable business, however, brings in
two-thirds of its earnings before interest, taxes,
depreciation, and amortization, or Ebitda. Its po-
sition there is unmatched, as the largest player
with the most sophisticated hardware and soft-
ware interface, Xfinity X1, which some other ca-
ble carriers pay to license. Comcast’s recently
launched Flex service gives a free streaming de-
vice to broadband-only customers, keeping those
who step down from cable TV in the software
ecosystem.
Matt Strauss, the new head of Peacock, says his
vision for the future of television is a screen that is
always on. “The TV is the biggest display in the
home,” he says. “In the past, it’s where you watched
video, but in the future, it will be for monitoring
cameras, controlling the thermostat, and more.”
Barclays analyst Kannan Venkateshwar views
rebundling as the future of streaming, and broad-
band providers as best-positioned to do it, because
broadband and streaming are highly correlated
services, whereas broadband and cable TV had lit-
tle to do with each other. But in his view, only
Comcast has made the technological investment to
allow it to add high value as a bundler.
Matthew Harrigan at Benchmark, the biggest
Comcast bull on the Street with a $64 price target,
says that even assigning zero value to TV would
leave the stock worth a price in the low $50s. The
shares recently traded at $45 and change.
Other Cable Companies
They have raced ahead: Charter Communications
is up 55% this year, and Altice USA (ATUS), 80%.
Those two are 15% and 9% more expensive than
Comcast, respectively, based on enterprise value
against forward estimates of Ebitda. Investors
should prefer Comcast, for its greater ability to
compete against Apple and Amazon to become a
major streaming bundler.
Netflix ...............................20,M
Hold off. This past week, the company missed
third-quarter estimates for subscriber wins, but by
only a little, which was a good-enough showing
ahead of the introduction of well-funded rival ser-
vices. The bull case on the stock is that Netflix’s
huge and growing global customer base will allow
it to hold the line on content costs and gradually
raise prices, resulting in significant free cash flow.
Barclay’s Venkateshwar, who sees rebundling as
the future of TV, views Netflix as likely to become
the equivalent of an anchor network.
Investors have lately turned skeptical on cash-
burning companies, however, and Netflix, which
has gone through more than $5 billion in the past
three years, is expected to consume another $7 bil-
lion over this year and the following two, before
generating positive free-cash flow in 2022. Esti-
mates have been slipping. The stock peaked above
$400 last year, but recently traded below $300.
Many studios, meanwhile, are pulling content
from Netflix. At the very least, they are driving up
the cost of shows, and new competition could make
price increases more difficult. Leave the stock
alone for now, and wait for free cash estimates to
begin moving in the right direction.
Walt Disney..............................
Stick with the stock, but don’t expect rapid gains.
It is up 20% this year, even though earnings per
share are expected to decline by as much, because
investors understand that the profit decline is tem-
porary and because the stock was cheap to begin
with. Disney+, which will tap the company’s Pixar,
Marvel, and Star Wars franchises for a mix of
library hits and exclusive new shows and films,
requires substantial upfront spending before sub-
scription dollars can cover the cost.
The company says the service will break even
in about five years. Until then, it will look like a
little Netflix inside Disney. Yet within two years,
losses for Disney+ will be small enough that the
overall company can return to growth on gains
for theme parks, films, and other businesses.
Disney and Amazon recently clashed over ad
revenue from Disney apps that appear on Amazon’s
Fire TV service. That illustrates how streaming
networks and streaming bundlers will vie for
power, just as TV networks and cable bundlers do.
“I think that has been overblown,” says Kevin
Mayer, who runs Disney’s direct-to-customer busi-
ness. “It’s not war. We’re just negotiating.” Disney
has been offering discounted streaming subscrip-
tions to customers who prepay for up to three
years. That could help with early growth, and
churn. Mayer says the offers have been “well
received.” A bundle of Disney+, Hulu, and
ESPN+ comes in a few bucks lower than the top
Netflix offering—a compelling pitch.
“Everyone seems to be setting this up to be an
us-versus-them battle with Netflix,” Iger says. “We
don’t see it that way at all. We’re well differenti-
ated.” If he’s worried about customer turnover, it
doesn’t show. “Netflix has managed to control
churn brilliantly,” he says. “We think we will, too.”
Iger says that Disney eventually will harmonize
the two technology platforms that will be used for
its streaming services at first.
Mayer points out that Disney will continue to
make good money in cable. “We have a hedged
position,” he says.
AT&T....................................
Buy the stock for income, but be ready for price
volatility. Time Warner, bought last year, brought
a streaming-friendly mix of sports, news, films,
and DC Comics superheroes, plus HBO, which
has an over-the-top offering. But legacy AT&T
has one of the weakest hands in TV distribution.
Its DirecTV and U-verse are losing customers. So
is AT&T TV Now—the new name for the Direc-
TV Now skinny bundle.
The fix for all of this, the company hopes, is a
new OTT service with a slightly skinnier name.
AT&T TV, which is currently available in a lim-
ited number of cities, comes with a streaming box
running Android TV software and offers channel
bundles that rival traditional cable. On Oct. 29,
the company will host a WarnerMedia day in
Burbank, Calif., where it will offer details on
HBO Max, another streaming service coming in
the spring, and will presumably explain how the
services will work together.
That neither streaming service will carry the
DirecTV name says something about the wisdom
of the $49 billion acquisition of the satellite opera-
tor in 2015, but what’s done is done. Elliott Man-
agement, an activist investor, is pressuring AT&T
to review its TV portfolio, perhaps sell the satellite
business, and put cash toward stock buybacks and
debt repayment. Fortunately for AT&T, the U.S.
wireless phone business has rarely been stronger.
An agreement this month to sell operations in
Puerto Rico and the Virgin Islands to Liberty
Latin America bolsters cash.
Lower debt will add confidence in the outsize
dividend yield, recently 5.4%. And AT&T shares go
for a modest 10 times earnings. In September, the
company appointed WarnerMedia’s boss, John
Stankey, to a newly created No. 2 position, setting
him up to succeed CEO Randall Stephenson.
Ultimately, AT&T will need to explain why the
N/A= Not Applicable Source: Bloomberg
Prime-Time Lineup
How the streaming stocks stack up.
Comcast / CMCSA $45.50 34% 14.5 1.9% $206.
Netflix / NFLX 274.14 2 54.5 None 120.
WaltDisney/DIS 131.22 20 24.3 1.3 236.
AT&T/T 38.04 33 10.4 5.4 277.
CBS / CBS 37.31 -15 6.6 1.9 14.
Viacom / VIAB 22.37 -13 5.4 3.6 9.
Roku/ROKU 125.91 311 N/A None 14.
Amazon.com / AMZN 1,754.76 17 67.5 None 868.
Apple/AAPL 234.51 49 18.8 1.3 1,059.
Alphabet/GOOGL 1,241.79 19 24.1 None 861.
Company / Ticker Price Change P/E Yield Value (bil)
Recent YTD Price Forward Dividend Market