Comcast Stays The Streaming Course (NASDAQ:CMCSA)


Comcast (CMCSA) continues being Comcast: its linear model is under constant assault by the allegorical scissors-to-cord crowd, but its legacy businesses, driven by the much-needed, especially by Netflix (NFLX) et al., broadband services in which it is heavily invested, help to deliver cash flows that allow for reinvestment in content and new streaming platforms. During the pandemic, binge-watching has become a psychic panacea for a population that has no choice but to patiently wait for a vaccine solution. The company is clearly benefiting from that trend.

But, as theaters continue to find it difficult to attract crowds and gain approval to open in major markets, the other part of the equation comes into light: premium-video-on-demand offers mitigation for the company’s suffering multiplex-distribution operations.

Put streaming and PVOD together, two interconnected digital strategies, and you’ve got a thesis for now, and, if the CEO wills it, the future. I will look at these two components in brief (in the context of the recent Q2 earnings call), and, putting them together, propose a bullish outlook for a cable giant that should find growth over the long term. The shares may not be trading at much of a discount, but the premium paid for them reflects a lot of potential value in the company’s overall content/distribution strategy.

PVOD: A New Approach

I’ve been arguing for a long time that the movie industry needs to change its approach. Windows can protect value, but at some point, they need to become flexible instruments. But, given that movie houses such as AMC Entertainment Holdings (AMC) understandably want to vigorously protect their capital investments in exhibition, controversy has always surrounded the proposition of closing the three-month window between a film’s silver-screen start and its digital-screen debut. Recently, though, there has been progress: AMC has agreed, according to an article from earlier in the summer by The Hollywood Reporter, to a deal with Comcast in which a movie from the company’s film studio can be ported to ancillary markets after seventeen days of release. As has been highlighted in reports, that’s three weekends of play at a multiplex, and that’s an important point, because three weekends can offer, for certain blockbusters, ample chance to capture a majority of a box-office run, especially if the project turns out to be particularly frontloaded in terms of gross dollars. In other words, it seems to be fair to theaters and fair to studios. AMC reportedly will also receive a percentage from the premium-video transactions.

Another reason for shareholders to like this deal: it doesn’t destroy the traditional model of physical/digital releases. As the linked article mentions, Comcast could, if it felt a particular project’s emerging economics were signaling a specific strategy, go beyond the three weekends, and it can keep in place the usual lower-price-point digital release after the PVOD option is executed (i.e., the one that occurs after the usual ninety days have passed). Contrasting that with Disney (DIS), which decided to somewhat alter the characteristic of PVOD with the experiment of placing Mulan on D+, thus requiring a subscription to get the film and to subsequently keep it, Comcast is keeping previous windows intact, but is basically compressing one of them.

Comcast benefits in a couple of ways from this strategy. There is an opportunity for a higher margin via the digital release, which is an attractive prospect, especially when transactions are leveraged on the Xfinity ecosystem itself. The company also retains optionality during the pandemic, which allows it to manage risk: if a theatrical release that would have worked pre-crisis can’t attract enough patrons to the multiplex, then the mistake can be corrected on an expedited basis. Bringing money in more quickly is of significant import to cash-flow statements these days. There also is the intangible marketing value possibly attached to a proximate day/date strategy: the shorter theatrical release could activate a higher amount of digital transactions, even ones after PVOD, in my opinion, by acting as what would essentially amount to an advertisement for the post-multiplex windows. As a balance to the decline in film revenue, PVOD is a must: as highlighted during the earnings call by CFO Michael Cavanagh, on-demand transactions from new films (e.g., the Trolls sequel) helped to generate a 20% expansion in content licensing.

There was a very interesting question posed by an analyst during the call, on a topic I have discussed in the past. It has always been my belief that exhibitors would do well under near day/date releases (or even day/date releases) because collapsed windows probably would usher in a higher amount of new films during any given calendar year, potentially increasing revenue; this would be sourced to the fact that theatrical runs would obviously be shorter in duration in most cases (in some cases, again, a particularly successful blockbuster might require continued bookings). Studios likewise would appreciate the opportunity to take more swings at the bat while simultaneously increasing the size of a valuable library that will eventually power streaming initiatives. Credit Suisse’s Doug Mitchelson wanted to know if the new seventeen-day minimum window with AMC theaters would signal a likelihood of an increase in investment in a slate with a larger number of celluloid constituents. I was surprised at NBCUniversal CEO Jeff Shell’s answer: apparently, the answer, at this time at least, is no. What Shell is after is a higher ROI on the same level of output. That is certainly understandable, especially given that there would be a need to increase exposure risk in terms of marketing costs to an expanded slate (indeed, one thing saving media companies from truly disastrous results in their movie units is a reduction in marketing costs generated by the absence of exhibition: NBCUni’s EBITDA in that segment actually rose 25% during the second quarter). However, releasing a higher number of films intuitively would seem to be the correct strategy in the wake of a collapsed-window reality. With a streaming asset in play, the studio shouldn’t worry too much about the possibility of a decrease in ROI since subscribers are always seeking fresh content. (If I was to guess, I would proffer that the company will eventually switch gears and explore a more-movies-in-the-marketplace strategy.)

Streaming

The streaming thesis for Comcast continues to be a priority. According to Comcast CEO Brian Roberts, Peacock had 10 million users at the time of the Q2 release. According to this article, that number has jumped 50% to 15 million. On the earnings call, there is mention about the monthly-active-user metrics, as well as monthly-active-accounts. This becomes important to advertisers, as Peacock is, in part, ad-supported (there is a premium option available as well). These are early days, and for now, management seems satisfied with the results, and I would say that the goal of as many as 35 million monthly-active-accounts in a few years is easily achievable (I expect the company to beat that number). The SARS crisis will obviously be a driver, but even beyond that reason, Peacock should thrive long term, perhaps not at the scale of a Netflix, but at a scale that is nevertheless value-enhancing for Comcast.

The earnings call had some discussion about how movies would play in relationship to the collapsed-window deal. Jessica Reif Ehrlich of Bank of America Securities asked if the latter would affect the windowing of films on Peacock, presumably to mean if they would come to the platform earlier. Management said it didn’t believe there would be any changes, but I have to think that is suspect at this point. Certainly not every film should be released straight to Peacock, but I anticipate smaller-to-mid-budgeted theatrical projects to be used on the platform as a way to attract attention and gain more advertising dollars and users. It just seems obvious, and again, since this is a nascent period for Peacock, one would expect an evolution of approach over time. This would lead back to making more movies: if there is an increased number of movies, then streaming can be used as a laboratory to run multiple experiments from which data can be collected and conclusions can be reached.

The big criticism of Peacock – and I have discussed this before, certainly – is the quality of the content portfolio on it, as well as the confusion of how to access it. If you want all of the service, you have to subscribe for a monthly fee; if you go advertiser-supported, you may not get it all. And there is an advertiser-free tier. While it can be confusing, these options are not that complex in nature, and they offer the ability for the company to market to different consumer bases, thus hedging against the risk of any one approach (I hope management stresses the no-ad-premium model since the company does have ample exposure to advertising already). As for the quality of the content, there is the specific issue of the killer-app program that will drive subscriptions. As NBCUni strikes more overall deals with talent and seeds/incubates originals, the assumption must be that a hit will emerge at some point. I am willing to be patient on that issue.

The Stock

Moving on to the stock itself, the first thing I want to cover is the dividend quality. According to SA’s dividend grades, the shares rate highly on consistency, growth and safety. There is a lower grade for yield. At 2%, the yield indeed is not similar to an income stock like a REIT, but for the media sector, it isn’t too bad, especially given long holding periods where the concept of yield-on-cost can be exploited. Plus, in my opinion, Comcast has opportunity to grow capital appreciation as well as yield because of its ecosystem and its content initiatives.

Overall valuation is only average at best, according to SA data. And this is a stock looking to buck its somewhat narrow trading range, with the low for the year in the $30 area and the high close to $48 (price at the time of writing, around $45).

For me, valuations are pretty tough to nail right now since the ongoing pandemic crisis will surely alter a lot of financial factors over the next couple of years, even after the first draft of a vaccine is released. I think a focus on the underlying story is requisite. The story here is streaming and PVOD. Consumers will surely continue to gravitate toward both media paradigms. Comcast can use its broadband-driven cash flows to invest in both strategies in an effort to continue balancing out its reliance on linear. I don’t see the stock technically breaking out of its range just yet, but over time, I anticipate growth. As I’ve stated before, this stock is preferable on weakness.

Disclosure: I am/we are long CMCSA, DIS, NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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