There are many different aspects of Warren Buffett's investing philosophy. One of his trademarks is being a contrarian. At its core, contrarian investors do not follow the crowd. Instead, they may see opportunities in businesses others have soured on.
One of Buffett's less-publicized positions is telecommunications company Charter Communications (CHTR 1.12%). With streaming services playing a major part in the popular trend of cutting the cord with cable providers, Charter Communications might not appear to be an investment with robust growth prospects.
However, by zooming out and looking at the bigger picture, a contrarian might think Charter Communications is actually in an enviable position as 2024 draws near. Let's dig into why this telecommunications giant could be a stealthy buying opportunity for investors now.
NASDAQ: CHTR
Key Data Points
Why next year could be huge for advertising
Cutting the cord with traditional cable providers and flocking to entertainment platforms on Apple, Amazon, Netflix, or others is turning the media industry upside down. The days of watching television while you sit around the dinner table and get bombarded with commercials are dwindling. As a result, advertisers have swiftly allocated increasing portions of marketing budgets to alternative media properties -- namely streaming.
As 2023 draws to a close, there is one obvious reason next year could be a big one for advertising dollars. 2024 marks the inception of a new election cycle. According to a report by AdImpact, next year's political advertising dollars could reach an all-time record, eclipsing $10 billion. Of note, this includes campaign dollars geared toward traditional television formats, connected television (CTV), radio, and digital platforms.
Chart by author.
How can Charter Communications benefit?
While the forecast increase in political ad spend could bode well for Charter, it's more important to understand where those dollars will be allocated. AdImpact is projecting that over 70% of the $10.2 billion expected total will be geared toward traditional broadcasting and cable providers. By contrast, only $1.3 billion is assumed to be targeted for CTV.
While it's far too early to say whether AdImpact's figures are accurate, the broader themes are encouraging in that the firm's research suggests a tailwind of advertising dollars placed on legacy cable and media properties. Given Charter Communications is America's second-largest cable company, it should be a major beneficiary.
Management echoed this sentiment during the company's third-quarter earnings call, stating that the "positive impact from political advertising" in 2024 should help curb concerns over its growth prospects.
Image source: Getty Images.
Is Charter Communications a good stock to buy?
CHTR PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
The chart above illustrates the forward price-to-earnings (P/E) ratio for Charter Communications benchmarked against a cohort of cable and internet service providers. It's easy to see that Charter's forward P/E of 11.5 is the second-highest in the group, trailing only Dish Network.
While this might make the stock look expensive, it could be viewed as a good thing that Charter is valued at more of a premium compared to the competition. This could signal that the markets are more bullish on the company's growth prospects compared to other cable providers.
CHTR PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
Moreover, Charter's current P/E of 12 is roughly half its three-year average. While this makes some sense, given the rise in popularity among streaming services, investors could make a case that the stock is oversold and trading at a bargain valuation.
When it comes to legacy media, I see two primary threats: streaming and lumpy revenue due to the cyclical nature of advertisers. 2024 just so happens to be a year during which advertising spending has a good probability of increasing compared to non-election periods. As such, the cable industry looks well-positioned to benefit.
I would not buy Charter Communications stock solely based on its prospects of seeing a jump next year due to the upcoming election. Like Buffett, I'd encourage a long-term outlook. When taking a position in the stock, investors should assess the whole picture and question Charter's long-term viability as streaming becomes more common. It might be best to pass if you think traditional cable and media companies can't survive in the age of streaming.
But on the flip side, keep in mind that many legacy cable platforms, including Charter, have either launched their own streaming services or created alternatives to businesses such as Roku. When it comes to Charter and cable providers in general, I think it will be a long time before streaming completely eclipses their operations. For this reason alone, the poor sentiment around telecom stocks may be overblown.
Moreover, given the strong momentum Charter could garner next year from advertisers, coupled with its near rock-bottom valuation, now looks like an interesting time to scoop up some shares at a bargain.
