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Broadband stocks: Investors are ‘understandably grappling with valuation,’ analyst says

MoffettNathanson Senior Managing Director Craig Moffett joins Yahoo Finance Live to discuss broadband stocks and two reasons why the industry is seeing slower growth. (Verizon owns a stake in Yahoo Finance's parent company.)

Video Transcript


- Well, the largest US cable companies are grappling with a growth problem, with Comcast reporting zero broadband net additions in its most recent quarter. That's raising concerns about the fundamentals of the sector. Joining us with more is Craig Moffett, MoffettNathanson Senior Managing Director.

Craig, Comcast isn't alone. Certainly, we've focused really on those net-zero additions, but we also saw charter drop about 42,000 in their most recent quarter. What's going on?

CRAIG MOFFETT: Well, that's the big debate is to exactly why. There are two schools of thought. One is that the broadband business is simply saturated, and there isn't any growth left for anyone else or for the cable operators anymore.

The alternative thesis that is much more threatening is that cable operators are significantly losing market share to alternative broadband providers, particularly fixed wireless broadband. And we've seen this big jump in the number of subscribers added by Verizon and T-Mobile to what are actually pretty new fixed wireless broadband services. And so that debate is, right now, what's animating the activity of the cable stocks.

- Let's talk a bit more about that. I mean, for those who are not using fixed wireless, it comes at a cheaper price point but at more of a limited speed, compared to broadband. You mentioned T-Mobile and Verizon. What does that tell you? I mean, if it really is about that, what does that tell you about the trade downs that consumers are making? Is it about the price point, especially as consumers have to deal with a lot more cost pressures?

CRAIG MOFFETT: Maybe, maybe not. The evidence suggests right now that certainly a very, very disproportionate share of those fixed wireless broadband customers are coming in rural markets, where there simply aren't good broadband alternatives. The idea that there is a segment that would be price sensitive among cable subscribers that would like a cheaper alternative certainly isn't a surprise. I'm not sure you would conclude from that that that is a sign of macroeconomic weakness or anything, that that segment would always be there in any time, good or bad economy, I suspect.

And it is almost certainly the case that the larger market still prefers a better, faster product. The question is still, when you haven't had that competition before, how big is that segment that would prefer a cheaper product, and how many of those customers, importantly, will Verizon and T-Mobile be able to serve? Because there are real capacity limitations on the ability of fixed wireless to serve a large number of customers.

- So if we talk about Comcast and charter specifically, what are the levers that they can pull? I mean, you mentioned in your note that a company like Comcast, I mean, for long, the bet was that there's going to be more cord cutting. Broadband is kind of where the expansion is going to happen. That hasn't played out. So what's the other driver?

CRAIG MOFFETT: Well, it has. I mean, go back a long way. Right? And remember, people were terrified that the loss of video subscribers to video cord cutting was going to kill the cable operators. It didn't.

They transitioned from video being their core product to broadband being their core product, and it turned out to be a better business. And the stocks have actually done spectacularly well over the last 15 years as a result. This transition is harder but this transition will be one from broadband to wireless.

Now, I wouldn't suggest the wireless business is as good a business as the broadband business, and so the market is, understandably, grappling with valuation and thinking about, OK, if broadband is slowing down and wireless is accelerating, how good is that transition? How profitable is that transition, and what do you want to pay for it? Think this is some kind of an end game for the cable operators.

The cable operators are actually still quite well positioned, but I'll go back to what we were talking about first. A lot depends on what you believe the explanation is for the deceleration in broadband. If it is simply saturation, and the market for broadband is hitting a wall, then growth will slow to something like population growth rate or household formation growth rate, which is to say a very slow growth rate but, still, something positive or flattish. There'll still be some pricing growth on top of that, and that's actually a reasonably benign scenario.

If it is more sinister, and it's that the cable operators are losing market share to not only fixed wireless broadband but eventually to fiber and the fiber overbuilds from telephone companies, then your imagination can run wild about not only how many subscribers you might lose but also what kind of pricing pressure you would see in that environment. And that's a much more difficult scenario for cable investors and for the cable companies to deal with.

- Yeah. Craig, let's broaden this out beyond just broadband. We were just showing all the major telco companies on our screen. When you consider the current macro environment, who do you think is best positioned?

CRAIG MOFFETT: Well, we've for a long time said that the most attractive name in this sector is T-Mobile, and I continue to think that's the case. They have the best network among the wireless operators, as we enter 5G, and they have the lowest prices. And that is, naturally, a very compelling offering for consumers. And the idea that they can continue to take market share, and while they do that, continue to benefit from the cost synergies of their merger with Sprint, a few years back, makes them to me the most attractive name. And they're still actually, although the stock has done quite well, they're still actually quite reasonably valued, and so it's a no brainer for me.

I still think the cable operators are attractive. It's harder to see exactly what the catalyst will be that gets those stocks to recover, but they are very attractive cash generators, not particularly cyclically exposed, and still have very strong businesses. And like T-Mobile, have a very strong wireless offering that is significantly cheaper than the overall wireless market. And so the idea that they'll take a lot of market share is also, I think, a reasonably safe bet.

- We'll all be watching Craig Moffett, MoffettNathanson Senior Managing Director, appreciate your time today.