What happened

Shares of Charter Communications (CHTR 2.24%) plummeted after hours on Tuesday, and are trading 14% lower on Wednesday as of 1 p.m. ET.

Late yesterday, the company held its investor day, the first under new CEO Chris Winfrey, who took over for departing CEO Tom Rutledge just last month. Unfortunately, it appears Winfrey's plan to spend aggressively to expand and upgrade Charter's network is rankling shareholders, who are used to ample capital returns in the form of share buybacks.

So what

As part of Charter's new spending strategy, the company plans to spend about $10.65 billion on total capital expenditures in 2023, far higher than some investors expected.

The spending increases fall into two broad categories. First, Charter is upgrading its network to DOCSIS 4.0, which will increase speeds in Charter's coaxial-based footprint, to enable better competition with the expensive fiberoptic cable that some competitors are rolling out. The network upgrades should cost about $6.5 billion to $6.8 billion next year.

However, the big surprise was the second part of the strategy, which is to aggressively expand Charter's footprint this year and next. Typically, Charter spends about $1.5 billion per year on line extensions, and these extensions are usually placed in fairly dense urban or suburban areas near existing infrastructure, such as when new housing developments are built.

However, Charter is now looking to build out to rural areas over the next few years, which will take that line extension spending to around $3 billion in 2022 and $4 billion in 2023. Rural areas also pose some risk, as they may be more expensive to reach per household, and the payoff may take longer. 

Charter claims it will get a return in the mid-to-high teens on these rural investments, but the payoff in terms of potential revenue growth will be years out, after the build is completed. According to Charter's plans, the higher rural spending is part of a five-year plan. So while the rural spending will peak next year, it should continue at elevated levels through 2027.

Now what

Today's sell-off seems a bit harsh, as Charter in general has a good history of generating returns on its investments.

However, the ramped-up spending might also be seen by some as a defensive move, to counteract the threat from competitors laying down expensive fiber, as well as from fixed 5G wireless companies now offering wireless broadband in less dense areas. Charter was already selling off this year due to muted customer relationship growth, which management claims is due to low household moving activity since the pandemic and the tough housing market this year. However, some may suspect there could be larger growth challenges at hand, forcing Charter to look to rural areas for incremental customer gains.

Whether Charter is successful with these investments will probably take years to assess, so it's no wonder some investors are fleeing the stock today. Many had grown accustomed to Charter's high free cash flow and generous share buybacks and don't want to wait around to see if this investment cycle pays off.

That being said, Charter's stock looks very cheap at the moment, trading at 10.5 times earnings and just 7.2 times free cash flow after today's decline.