It would be easy for an investor to decide it's a name to simply steer clear of. Comcast (CMCSA 1.35%) is well established as a cable television player -- now sold under the Xfinity name -- but conventional cable television is dying. Why bother, when there are other, real growth opportunities out there?
But Comcast isn't just cable anymore. In fact, cable TV is only a tiny part of what this telco giant does. Most of its business lines have been adversely impacted by the COVID-19 pandemic. But those businesses will be able to recover nicely once the pandemic is in the rearview mirror.
This diversity alone makes Comcast a compelling investment prospect. The fact that the company is starting to apply leverage in new ways makes it an outright buy.
Image source: Getty Images.
Well diversified
The graphic below tells the tale. Comcast manages three different divisions spanning nine different kinds of business through 20 different reporting units. They're all ultimately centered around entertainment of some sort, but they're not all of the exact same ilk. The company owns theme parks, a television network (NBC), a movie studio (Universal), a cable television service (Xfinity), a broadband service under the same name, a new streaming platform (Peacock), and more. It's even wading into the mobile-phone business.
Data source: Comcast. Chart by author.
That diverse portfolio hardly shielded Comcast from the impact of the COVID-19 pandemic. Its theme parks and movie arm suffered tremendously last quarter under the weight of shutdowns. For perspective, the company's theme park revenue for the quarter ending in June slipped from more than $1.4 billion in the second quarter of last year to only $87 million last quarter. Theatrical revenue of $8 million was a tiny fraction of the $252 million worth of movie revenue that Universal achieved in the comparable quarter of 2019.
Yes, consumers watched far more TV than they usually might in that environment. The advertisers that normally help support that business, however, have tightened their purse strings of late. Advertising through its cable platform slipped 27% year over year during Q2. Ad revenue for its network broadcasting business fell nearly 28%.
You get the idea -- things have been tough. All told, Q2's total top line slumped 11%. Earnings didn't fall quite as much, but it fell all the same.
Don't read too much into that particular quarter, however. Like most other companies, Comcast had no plan for the unthinkable to happen. Most of this year's headwind has been entirely out of its control. Most importantly, that headwind should be in the rearview mirror soon enough.
Applying leverage
It can be tough to see through Comcast's complexity, but this is a media company that operates in a huge vertical silo. That is to say, each of its businesses helps fuel at least one other business in a low-cost or no-cost way.
For instance, its new Peacock streaming platform leverages a great deal of entertainment content that's already been made by Universal or NBC, and has already been monetized by each of those divisions. There is some new content being made exclusively for Peacock, but Comcast tapped Universal and NBC's production arm to create it.
The company's Xfinity brand of television service is another self-serving platform. Comcast bundles that with broadband and phone service, and more recently has sold a discounted wireless service under the same moniker to existing internet customers.
What customers don't readily see is that unlike completely wireless connections offered by mobile carries such as AT&T or Verizon, Comcast's wireless service, relies heavily on the company's existing wired broadband connections to connect those users to the network. (That's why it's only available to existing broadband customers.)
And it's working. As of the end of Q2, nearly 2.4 million of Comcast's 29.4 million internet customers were mobile customers. That's a solid start for a service that only launched in 2017.
Looking ahead
Yes, Comcast is a buy.
The use of one of its arms to drive business to another arm isn't exactly new. Comcast acquired NBC and Universal back in 2011, melding a TV and movie outfit with a means of distributing video entertainment. The company had been bundling landline service with broadband and cable service since bundling has been a thing.
What is new, however, is the capacity to apply more leverage than it's ever been able to apply before. The advent of Peacock leverages existing Xfinity customers by giving them access to Peacock Premium for free, but that version of Peacock still airs revenue-bearing television commercials. Much of the content airing on Peacock is also available through linear cable service, but its availability on Peacock doesn't necessarily do harm to its existing cable television business.
Another relatively new development is the launch of Xfinity Mobile, but Comcast didn't have to build an entire network. Xfinity Mobile is a mobile virtual network operator (MVNO) that uses Verizon's network, and Comcast supplements this capacity with a Wi-Fi network it had already built and currently maintains anyway. Xfinity Mobile encourages consumers to become Xfinity broadband customers.
NBCUniversal's recently unveiled One Platform leverages data from the company's network and streaming platforms to give advertisers a powerful, "data-informed" ad-buying interface.
It's still not clear exactly how much additional business all of this fresh product and tech integration can produce. It's difficult to see, however, how it won't work well. Analysts think so, anyway, modeling growth headed into next year. The COVID-19 turbulence seems to already be easing, or at least worked around.
Data source: Thomson Reuters/Refinitiv. Chart by author.
