Comcast, Charter slip as Barclays downgrades pair on broadband concerns
Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR) shares slipped on Monday as investment firm Barclays Capital downgraded both stocks, pointing out concerns over their broadband businesses. 
Analyst Kannan Venkateshwar cut his rating on Comcast (CMCSA) to equal weight from overweight and Charter Communications (CHTR) went to underweight from equal weight, as concerns about competition for broadband subscribers could just be getting started. 
"With full year broadband sub growth at Comcast and Charter now expected at ~300k and ~200k respectively this year (vs our pre-Covid forecast of 1.2-1.4M each), the growing debate is likely to be about the likelihood of potentially negative broadband [subscriber] growth next year and beyond given that the macro backdrop and competitive environment looks likely to worsen," Venkateshwar wrote in a note to clients.
Comcast (CMCSA) and Charter Communications (CHTR) shares fell roughly 1% in premarket trading. 
Venkateshwar added that Charter Communications (CHTR) management "almost seems in denial" when asked about competition, but if T-Mobile (NASDAQ:TMUS) is able to grow its fixed wireless access business, or FWA, to the high-end of its guidance, at roughly 500,000 per quarter, it would be bigger than Altice (ATUS) by the end of 2023.
"It is tough to see this not impacting cable structurally when cable net adds overall have been [3M] in normal years and [T-Mobile] and [Verizon] alone could add 2-2.5mm FWA subs a year," Venkateshwar added. 
Then there is the threat of the existing digital subscriber line subscribers converting to fiber, driven by the U.S. government's investment in high-speed internet services, as well as AT&T's (T) fiber expansion, which could result in an additional 20% overlap with cable's existing footprint. 
There are some concerns that FWA is not a long-term solution and that companies like T-Mobile (TMUS), Verizon (VZ) and AT&T (T) may have to add spectrum. However, even if it's not a long-term solution, it could be a "significant headwind for cable over the next 2-3 years," the analyst added.
It's possible that Comcast's (CMCSA) and Charter's (CHTR) wireless businesses could help offset the lack of broadband growth, with the companies adding 317,000 and 344,000 subscribers in their most recent quarters, respectively, while T-Mobile (TMUS) added 397,000.
However, it's not likely to have the same "valuation impact" on cable that fixed wireless has had on telecom companies, as FWA creates a new revenue source and cable companies do not have plans for a "full infrastructure based offering."
It's unlike the companies' strong cash flows support their stocks, as Charter (CHTR) has spent almost twice as much cash on buybacks over the past five years as it has on capital expenditures. Charter (CHTR) has more debt on its balance sheet than Comcast (CMCSA), despite the fact Comcast is more than twice Charter's size when it comes to revenue and has an EBITDA that is 60% larger, all due to Charter's acquisition of Time Warner Cable, now known as Spectrum. 
It's possible that M&A becomes a bigger part of the story for cable and telecom companies, especially in light of Altice (ATUS) potentially selling Suddenlink for $20B.
The analyst added that the management teams of these companies may start to think about vertical mergers across cable and wireless, with Verizon (VZ) and Charter (CHTR) teaming up, or Comcast (CMCSA) and T-Mobile (TMUS).
"Given the present state of both cable and telecom industries and the inevitable path of product convergence, some of these permutations may get more serious consideration now," Venkateshwar explained, with the key hurdles being the cost of capital as well as the regulatory environment. 
Last month, J.P. Morgan downgraded Comcast (CMSA), citing worries over lower subscribers and weakening financials.
Analysts are largely positive on Comcast (CMCSA). It had an average rating of BUY from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates CMCSA a HOLD.