The Nasdaq Composite (^IXIC 1.59%) lost its upward momentum on Wednesday afternoon, as the latest announcement from the Federal Reserve on interest rates took the wind out of the stock index's sails. By the end of the day, the Nasdaq had fallen three-quarters of a percent, and Nasdaq futures signaled another likely 1% decline Thursday morning.
One area of the market that notably weighed on the Nasdaq's performance was the broadband industry. Two related companies in the space saw their stock prices plunge on Wednesday, putting downward pressure on some of their rivals. Given the announcement that Charter Communications (CHTR 0.48%) made regarding its business prospects, the question investors are asking is whether the broadband industry will see its future performance suffer as it strives to keep up with the pace of innovation in entertainment and communications.
Charter plans to spend more money
Shares of Charter Communications dropped 16% on Wednesday following its investor day presentation. Despite long discussions about the growth opportunities that Charter has, shareholders focused their attention on how much money the broadband company expects to spend investing in its business initiatives.
Charter presented its spending plans in the context of the opportunity it has ahead of it. The company already has valuable network assets that give it structural advantages in pursuing further expansion, and it pointed to its attractive customer pricing models and differentiated products in building and sustaining demand.
In particular, Charter believes it can cross-sell customers on a combination of wireline and mobile connectivity services, primarily through offering bundles that are hard for potential rival providers to replicate. The company typically gives customers promotional pricing on these bundles that save money compared to buying the services individually. Unserved and underserved areas are also a potential focus for Charter, as its unique combination of scale and operational capabilities allows it to play a role in rural network construction and other long-term, high-return projects.
To capitalize on these opportunities, Charter is targeting its network evolution for completion by the end of 2025. Equipment upgrades should boost speeds and throughput capacity across the network, with Charter deploying more advanced modems as they become available, likely in 2024.
However, Charter's expansion plans won't be cheap. The broadband carrier anticipates spending $5.5 billion for the entire project as part of a broader capital spending plan that includes an estimated $6.5 billion to $6.8 billion in 2023 for other improvements and another $4 billion for line extensions. Charter expects capital expenditures to remain elevated for several years, likely peaking in 2024 or 2025. Thereafter, it sees spending falling, as Charter starts to reap some of the cost savings of its upgrades.
Challenges across the industry
Share-price declines across the broadband industry resulted from Charter's news. Liberty Broadband fell 15%, as its primary asset is its stake in Charter. Rival providers posted more modest declines, including a 4% drop for Comcast and a 5% decline for Cable One.
Across communications broadly, the need for investment has been robust. 5G network upgrades are forcing wireless providers to spend in order to keep pace with competition, while demand for higher broadband speed from customers is forcing further investment even as many customers cut back on buying video services in favor of streaming content subscriptions.
Yet with Charter currently trading at around 10 times its expected earnings for 2022, it's hard to say that the company can't afford more investment. Indeed, in the long run, Charter and its peers appear to be finding a pathway to continued viability and overcoming the threat that cord-cutting posed. That could bode well for the stocks, suggesting that they won't keep weighing the Nasdaq down.
