Comcast Is Ready to Flex Its Muscle

Some investors believe that traditional cable companies could be big losers as linear television gives way to streaming video. Comcast (CMCSA 1.85%) wants to challenge this notion, and it's innovating to take on streaming, and the wireless market, at the same time. 

In fact, Comcast's Xfinity Flex is a secret weapon that should have other streaming devices shaking in their circuits. The introduction of the Flex should accomplish two goals. One, to protect its profitable Internet subscribers from leaving for other services. Two, to make sure that Comcast is the gateway to streaming services instead of its rival Roku. 

Along with the Flex, Xfinity Mobile might be the ultimate added bonus for Xfinity Internet subscribers. The wireless service may offer a better price for subscribers than they currently receive from larger carriers. Much like the Flex, Xfinity Mobile is also a retention tool for those all-important Internet subscribers. 

When you combine these two growth drivers, along with a reasonably priced stock, growth and income investors should have Comcast near the top of their buy list.

Photo credit: Getty Images

Flex on 'em

According to Grand View Research, the global video streaming market is expected to exceed $124 billion by 2025. As a quick comparison, Comcast generated an annualized $22 billion from video revenue in the last quarter. With video revenue down 1% annually, and customers declining by 3%, Comcast can't afford to sit still.

While Comcast tries to figure out how to get back in the game, one of the main beneficiaries of this shift toward streaming video is Roku. In the company's last quarter, active accounts increased by 36% annually to more than 32 million. In addition, streaming hours increased by nearly 70% year over year. 

From a competitive standpoint, Comcast's potential to address the streaming market is limited by its geographic coverage. Roku on the other hand, has a shot at selling a device or Roku TV to anyone who wants to stream video. Another key difference between the two is that while Comcast wants to sell customers its Internet service, Roku wants to sell advertising by pushing its operating system into more homes.

The good news for Comcast is that it has a product that seems to be getting little press, yet poses a serious threat to Roku and others. It's time for Comcast customers to get ready to Flex.

Photo credit: Xfinity Flex.

Roku is willing to sacrifice some profits to sell its players and integrate into smart TVs. However, Comcast is willing to give Internet-only users their first streaming box for free. Subscribers who want an additional box would pay $5 per month. The company doesn't seem to have plans for the Flex as a stand-alone service; instead, it wants to use this streaming box as a retention tool. Looking at the hardware, according to PCMag, the top-rated Roku device is the Premier+ priced at $44. A quick comparison to the Flex suggests Roku should be concerned.

Data source: PC Mag-Roku Premier+ and Digital Trends for Xfinity Flex.

The short version is that Flex offers the same features as Roku, but at no cost. 

While Roku already offers pretty much every streaming service you can think of, plus its own Roku channel, Flex is busy building its catalog. Some of the most popular services are on board, from Netflix to Amazon Prime Video to HBO. The service will be the home of NBCUniversal's Peacock service when it launches, and Hulu is expected soon. In the short term, customers may miss options like Disney+ or Spotify. However, these missing pieces are likely more related to getting the right deal in place, rather than attempting to squeeze out a competitor. With 21% of Comcast's revenue coming from video, and billions of potential revenue expected from streaming, this is a war the company can't afford to lose.

Challenging the unlimited plan promise

Streaming isn't the only way Comcast is hoping to bring value to investors. The company's Xfinity Mobile service is a growth opportunity and a retention tool rolled into one. 

The wireless industry seems to have an unwritten rule... everyone needs unlimited data. However, some cellphone users are beginning to realize that unlimited isn't the only option. One study found that over half of Americans on unlimited plans consume less than 10 GB of data monthly. In addition, 42% of respondents on a capped data plan were using just over 5 GB of data per month. Consumer Reports found that "more than half of those who switched providers in the previous two years said they saw a big drop in their monthly bill."

For subscribers considering switching to Xfinity Mobile, one of the first questions is likely about coverage. The great thing for subscribers is that Xfinity Mobile runs on the Verizon wireless network. The same network that Verizon constantly touts as being one of the best in the country is what you are getting. 

When it comes to service plans, on the surface, Xfinity Mobile's unlimited plan is challenging to recommend. The Verizon Play More Unlimited plan gives subscribers unlimited data -- and Apple Music -- for $45 per line per month. Xfinity Mobile's unlimited plan costs $45 per month. The good news for Comcast investors is unlimited pricing isn't the company's primary competitive advantage.

For customers who aren't using tons of data each month, Xfinity Mobile's pricing is quite aggressive, with 1 GB of shared data for just $12 per month. This strategy seems to be working, as wireless lines climbed to nearly 1.8 million last quarter, a more than 77% annual increase. Verizon's much larger base of more than 114 million subscribers increased by just over 2% annually, by comparison.

At just $12 for 1 GB, $30 for 3 GB, or $60 for 10 GB, Comcast is challenging the unlimited-for-everyone mantra. As a quick example, if two people are using around 5 GB of data per person each month, they could spend $60 a month with Xfinity Mobile. This same couple on Verizon would pay at least $70. If you have one power user, and one light user, the comparison favors Xfinity even more. For two light users, the numbers are almost comical. As a real-life example, my parents use less than 2 GB of data per month between them, so Xfinity Mobile means $24 for the entire month.

It's true that subscribers must also be with Xfinity Internet, but as I noted above, nearly 26 million already are. With fewer than 7% of Comcast Internet users also signed up for mobile service, the runway for growth is long indeed.

A rose by any other name

With the Flex offering a way for Comcast to gain ground in streaming, and Xfinity Mobile potentially poaching customers from bigger wireless carriers, the company has multiple ways to boost its revenue and earnings in the future. 

Given the choice between Comcast and Verizon, the meter clearly tilts in Comcast's favor. Both stocks carry a forward price-to-earnings ratio around 12 to 14. Meanwhile, Verizon's dividend yield sits 2 percentage points higher than that of its peer. However, Comcast is expected to grow earnings per share by nearly 9% over the next five years, compared to just 2% from Verizon. 

Investors looking for growth and income should gain some Flex-ability by adding Comcast to their portfolio.