Comcast Cashes In on VoIP
You've probably heard the news. This week, cable giant Comcast (NYSE: CMCSA) at last announced its plans for offering voice over Internet protocol -- it plans to provide VoIP service to 20 million homes by the end of 2005 and 20 million more by the end of '06. It's fair to think that news of the bold rollout -- which could take market share from Bell operators Verizon (NYSE: VZ), SBC Communications (NYSE: SBC), and BellSouth (NYSE: BLS) -- spells an investment opportunity. Perhaps.
Sure, VoIP economics make a lot of sense. It won't cost much more for Comcast to offer the voice technology to homes that are already passed by a cable network. VoIP also has far lower operating costs than a traditional circuit-switched telecom business. And Comcast could make a juicy profit margin of 50% on the service -- an amount well above those of its Bell rivals.
Still, to make any margins, it will have to work hard to entice customers. With VoIP service priced at $59.99 a month, or $39.95 when a household also buys its broadband cable service, Comcast could be a tough sell on its hands. Verizon's VoIP service is $34.95 a month, with a $10-per-month discount to broadband Internet subscribers. Vonage's service is just $24.99 a month.
Comcast's stock is pricey, and that ought to make you hesitate. Its A-class shares have had a great run-up since August and currently fetch 80 times earnings -- not cheap, at least by traditional metrics.
To think otherwise, you need to rely on the valuation arguments behind Comcast's current share price. Wall Street analysts don't value cable companies like Comcast on a P/E ratio. Instead, they focus on EBITDA -- earning before interest, taxes, depreciation, and amortization. At about 12 times EBITDA, Comcast's share price doesn't look nearly as expensive. But that's not surprising: EBITDA ignores the hefty depreciation and debt costs that hold back Comcast's bottom line -- and those are elements that investors can't afford to ignore.
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.