2017 was a year to forget for Comcast (CMCSA -6.40%), which saw its stock rise just 3% as the S&P 500 advanced 16%. Yet Comcast seems cheap at 15 times next year's earnings, and analysts expect its revenue and earnings to respectively rise 5% and 18% this year.
Will Comcast fare better next year? To decide, let's examine the three major headwinds that weighed down the ISP and media giant this year and whether they will fade in 2018.
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1. Cord-cutting is a major problem
Comcast is heavily exposed to cord-cutting, which causes customers to replace their traditional cable subscriptions with over-the-top (OTT) streaming solutions like Netflix (NFLX 1.44%). Comcast is trying to counter this trend by bundling together cable, home internet, and streaming services, but it still shed 125,000 video subscribers last quarter -- compared to a loss of 34,000 subscribers in the previous quarter.
That drop looks alarming, but Comcast is offsetting it with pricier bundles, which boosted its Cable Communications revenue by 5.1% last quarter. Comcast's home internet business is still growing, with the addition of 214,000 customers, since cord-cutters still need high-speed connections to stream OTT content.
2. Its answer to Netflix is unimpressive
Comcast's "answer" to Netflix is Xfinity X1, which blends together streaming content, live TV, apps (including Netflix), a DVR, and on-demand programs on a single platform. Last quarter, Comcast stated that 57% of its residential video customers (12.2 million households) used X1, up from 55% in the previous quarter and 45% in the prior-year quarter.
That growth seems solid, but Netflix's paid subscribers in the U.S. rose 10% annually to 51.4 million last quarter. Moreover, Comcast is still losing video subscribers, so the adoption rate of X1 is actually weaker than the rising percentages suggest. Therefore, X1 helps Comcast squeeze out extra revenue from existing customers with $10 monthly fees, but it's hardly a long-term defense against cord-cutters and OTT platforms.
3. Waning interest in NFL games
NFL games are traditionally a major source of advertising revenue for NBC, but NFL ratings have been slipping. Total NFL ratings for the first seven weeks of the season fell 5% year over year, and were down 15% from 2015. That decrease persisted through the Thanksgiving holiday, as NBC's NFL ratings dropped 10% annually.
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Analysts attribute those declines to the oversaturation of NFL games across multiple TV networks and internet platforms, as well as unappealing matchups and the divisive national anthem protests. The NFL's softness on NBC is a major problem, since it reveals that live sports broadcasts aren't a viable defense against cord-cutters.
Will these headwinds fade?
All three of those issues will likely weigh down Comcast's ISP and NBCUniversal businesses next year. But investors also shouldn't overlook Comcast's strengths.
First, Comcast's Theme Parks business (Universal Studios) is still growing rapidly, with its recent openings of Minion Park in Japan and Volcano Bay in Orlando. It also plans to open new parks in Russia and China. Revenue from that unit rose 7.7% annually last quarter and accounted for nearly a fifth of NBCUniversal's top line.
Second, NBC remains the highest-rated network in America, thanks to hit shows like This is Us. That strength boosted its adjusted Broadcast TV revenue (which exclude the impact of the Rio Olympics last year) by 12.3% annually last quarter.
Last, Universal's theatrical slate remains strong, with new films for its Jurassic World, Fast and Furious, Minions, and Insidious franchises. The growth of these successful franchises could also cast a halo effect on its theme parks with new attractions.
The bottom line
Comcast might seem like a risky play as customers cut their cords, but its diversified business gives it more room to maneuver than stand-alone ISPs or media companies. Comcast can use internet and cable bundles to lock in customers or pivot toward theme parks and movies if those declines accelerate.
I think Comcast's upside potential will remain limited next year due cord-cutting concerns, but its long-term growth potential remains bright. Meanwhile, the stock pays out a decent 1.8% forward yield for investors who are willing to wait.
