There have been some notable headlines around Comcast (CMCSA) recently. They include the idea of a spin-off of the NBCUniversal and Sky assets, as well as a challenge to what exactly defines the Peacock streaming-service strategy. One analyst has no idea what Sky is all about – or, rather, what the cable company intends Sky to be about. Then there is Peacock, and whether or not it will gain traction in a crowded direct-to-consumer-via-broadband marketplace.

Through it all, there’s Comcast the stock. I will look at the shares and its price action, and offer my current thinking on the strategy management is assembling to survive the shock waves still being felt post Netflix’s (NFLX) entry into the original-content arena. I want to explain why I am bullish on Comcast’s NBCUni-Peacock-etc. strategy by examining the various nuances of the media conglomerate’s recent moves.

Comcast Shares

First, let’s just get a sense of where the price action is for the stock.

ChartData by YCharts

To be kind, there’s a lot of opportunity here for the company and its shares. The long-term range is tight, and you would be forgiven to think of the company more as a utility-or-bond-type instrument as opposed to a high-growth maverick. In many respects, as a supplier of cable services, it is.

This may suggest parts of the company are undervalued, such as the NBCUniversal asset, which creates content and runs theme parks. Covid-19 may be ruining the fun there, but the hope is that the biotech businesses will bail us all out of that risk in time.

Where is the growth going to come from? It hopefully will be a combination of platform and original content, thus making a study of current strategy warranted.

Content

Content is what will ultimately drive shareholder value in the non-linear space. Linear aggregation of channels will always be around to infuse the business with cash flow, but at the moment it is not a growth industry. Thus, the exploration of the over-the-top world via Peacock.

It’s interesting because the company is starting small. One would think it would expend double-digit billions to get into the game immediately. It will over time, most likely, but with the Sky acquisition and the virus crisis, liquidity is something to be conserved.

Still, we can expect $2 billion to be spent initially, according to this Variety piece. Let’s really think about that: is that enough? That was my first thought, virus-crisis/high-debt-level or not. The author of the article likewise verbalized such concern. Matthew Strauss, the chairman of the Peacock and NBCUniversal Digital Enterprises segment, responded, as one might expect, with a no-concern-here attitude, declaring that the amount of capital used is not necessarily proportional to the success generated (the exact quote was “Spending more money doesn’t mean you’re going to be more successful.”). That might be an attitude-heavy response, but he is correct, and in a sense, comes across as conservative and refreshing in this age where Netflix and Disney (DIS) are printing money to lock up talent and be loose with budgetary limits. Of course, if Wall Street was bidding up the stock like it was a hot IPO instead of a legacy media utility, things might be different. But I do applaud Comcast’s initial restraint and hope innovation can overcome spending shortfalls.

Peacock is going to rely in part on licensed content to promote its value, with series such as The Office. Beyond that, expect reboots/remakes and other IP-derived programming. News will also play a big role, as will sports and late-night talk shows. But there’s a legitimate question I read in the comment section of past Comcast articles: where’s the killer-app content? Can you, I, or anyone else point to something that would make me people want to subscribe? AT&T’s (T) HBO Max arguably has the premiere content of HBO, while Netflix and D+ have their high-brand-equity shows. Peacock could be a little lacking. The aforementioned Office certainly isn’t it.

This could be taken one of two ways: as an opportunity for the future, or as a forever-missed opportunity. Bears who sport the latter will point to the amount of statistical interest in Peacock, as illustrated in a chart published in the Variety article. Comcast’s new service on the block beats Jeffrey Katzenberg’s short-form content proprietor Quibi at 6% (Quibi has 3% interest), but Don’t-Know comes out ahead at 8%.

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Here’s an advantage: Peacock comes to the market with low expectations and the ability to beat them. For the most part, the service is essentially something that hasn’t been defined yet. Management can pivot as time goes on into different competitive formats that are driven by changes in content. Arguably, Comcast knows that it wants Peacock to be successful, but it doesn’t know what the service exactly will be; such ambiguity may offer flexibility. It might give management space to experiment and finally hit upon the sorely needed killer-app content, the company’s own Game of Thrones or Stranger Things. Then, the company can exercise Disney-like synergy with such content via its parks asset.

Content is going to be the major driver, but platform/distribution offers its own needs and challenges. While content is more subjective and open – i.e., there are many chances to get it right – platform is more scientific in nature and harder to get right given that the space is already occupied by growth services.

Platform

Here is where it gets tougher for Comcast. Shareholders are familiar with the company’s desire to both have and eat the proverbial cake: the company wants to compete with Netflix while simultaneously saving the linear model. Two conflicting strategies have led the conglomerate to have a wide-distribution strategy in place for Peacock driven in part by an ad-supported process and a system of partner-deals. Going back to the content thesis, in contrast, this could lead a reasonable person to suspect that distribution is considered more important than content, and that the reliance on ads will serve as a hedge against the potential inability to develop the aforementioned killer-app material, or, perhaps, the lack of luck in being able to do the same.

Maybe that could turn out to be the case, at least initially, but it doesn’t mean that Comcast can’t generate long-term value with Peacock. Comparing everything to Netflix or D+ and then criticizing it when it doesn’t reach that level of standards might be missing the point (although I do concede it is a legitimate point to argue). Comcast simply wants to monetize its content in a maximal way, and to create new platforms that can mitigate linear declines. That’s the first goal in the launch, right or wrong. If we take the optimistic viewpoint, then we might say that it buys time to get to that killer-app content. And the company should have that eventual goal, sooner rather than later.

This brings me back to the earlier notion of spinning off NBCUniversal or Sky. As time goes on in the media marketplace, it wouldn’t surprise me to see spin-offs, asset sales, et cetera, as divisions inflate in value and start to morph into something that could be better off in other hands. Disney’s ESPN is probably the best example of that: imagine what it would have been like for the company today if, in the past, and when ESPN was at the top of its value range, the Mouse had reduced its exposure to the sports asset either in a significant way or, perhaps, in a total way by selling it off completely. The company would have had more room to expand its investments in fictional content, and it would have reduced reliance on unavoidable, as well as inordinately expensive, rights to sports contests in various leagues.

For now, though, in Comcast’s case, I don’t promote the idea of selling Sky, and especially not NBCUni. If one is in the platform game, then a studio is requisite. And while I wasn’t at times the biggest proponent of purchasing Sky (especially on the Disney side), I feel the cable giant knows that business and could use it to gain international footholds and forge relationships that will develop more global content that can be brought back to the domestic Peacock side.

NBCUni brings in billions for Comcast, but growth is stymied, admittedly. According to the annual report from 2019, page 43, revenue for the years 2017, 2018, and 2019 was, respectively and roughly, $33 billion, $36 billion, $34 billion. Bit of a tight range there. Adjusted EBITDA for those same respective years was $8.2 billion, $8.6 billion, $8.8 billion. A better trend there, although a higher growth rate would be welcome. For Sky, page 49 of the report is where you want to look to get an idea of that business: total revenue declined 3% to $19.2 billion (with pro-forma effects) while adjusted EBITDA advanced 7% to a little over $3 billion.

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Sure, on the surface, one might argue again after a quick look at such stats that the company might be better off reducing its current scale. Problem is, one’s mind then returns back to the problem of linear decline. It’s always going to be there (until something comes along to change that, be it a new, unforeseeable approach that adjusts consumers’ value perception of the traditional multichannel video-programming bundle, or a new technological solution, or whatever).

NBCUniversal is, hopefully, on a path of self-disruption that will unlock growth potential that is presently underutilized, and maybe even unidentified. It’s entering the streaming space pioneered by Netflix and cheered on by Wall Street, but as an ad-supported entity with multiple ways of access and variable pricing schemes, institutional investors may not find themselves excited, as commercials tend to receive a bad rap. That will limit the stock as a whole, and even if NBCUni was carved out as a tracking share, it arguably will take time for buyers to catch on to what Comcast’s content concern is about: it is the big bet that is funded by recurring revenue on the utility side of the company’s ledger. And the biggest bet is, of course, content first, and Peacock a very, very close second, even if the latter might not even seem in the running (just yet).

Consumers can hop on and off a service at will, taking a month here, then several months off there, all in the interest of watching the latest eight episodes of a hot show, or even catching Hamilton as it makes its streaming debut (Disney, of course, essentially made Hamilton a slightly more expensive transaction-on-demand play when it eliminated free trials for +). As such, to support subscription prices (and price increases) and minimize churn, Netflix’s Reed Hastings, Disney’s CEO Bob Chapek, et al. are racing to see who can schmooze the next A-list showrunner into the next record-breaking overall deal that covers broadcast/cable/multiplex/streaming/theme-park-ride/merchandise. Blockbuster-movie production is also in the race, as this news item about Netflix’s latest high-profile production makes clear, a $200 million business plan for a project that is meant to secure new subscribers and satiate existing ones.

With ads, though, Peacock might actually stand a chance of justifying the more-money-does-not-exist-in-direct-proportion-to-higher-subscriber-counts proposition. Advertising either gives something for free or subsidizes a lower subscription price point, and that alters the perception of the consumer, thus buying time until Comcast finally corrals its own Upside-Down mythology.

The Overall Thesis

That’s my perspective on Comcast’s platform/content strategies. But I want to put it all together, with a thesis that states Comcast can use the platform/content engines for growth.

For Peacock, I believe the variable-pricing/distribution approach will help the company build brand equity quickly (and with the Xfinity synergy allowing many subscribers to receive Peacock right away, Comcast is on its way). Consumers, especially during this surreal SARS situation, demand more options. Comcast is betting that it can deliver a value-priced product that has access to the lucrative (yet, admittedly, derided at times) advertising marketplace while building up a subscription model. Wielding a streaming product is requisite in the digital age, and Comcast has reams of data on its users to bolster its chances. More elusive is that aforementioned killer-app show, but these things take time, so I’m willing to wait on that a bit. After Peacock has been in existence for a while, I feel certain some positive equity/mindshare will naturally rotate to the service, just as a movie studio can only go so long with either a winning/losing streak (unless, of course, the movie studio in question is a Mouse based in Burbank).

Sky is similarly open-ended in terms of future possibilities, and the potential for cross-promotion is very high. It is an iconic asset overseas and can be looked at, from the domestic perspective, as one huge incubator for new IP that can be imported on our side (this goes vice versa, too). It obviously came at a high price (current debt as of Q1 was $100 billion), so there is an incentive to get this right (as well as perhaps to monetize whatever the company feasibly can). Total video customers were 20.8 million during this past first quarter versus 21.8 million last year, and broadband customers increased to 29.1 million from 27.5 million, so the secular decline in linear undoubtedly continues to weigh on management’s mind.

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I’m looking for Peacock to beat its forecast of between 30 and 35 million users in four years (according to the Variety article), but there are risks to the underlying economics. While 2024 is supposed to be a breakeven year, the question of how much capital will be needed to keep Peacock competitive remains an open question. Earlier, I praised the idea of not spending so much money, and I remain committed to that, but I will add the caveat that yield of quality, popular content will be kept limited if the problem of talent costs is not solved in innovative, imaginative ways (and you can bet all the agents in Hollywood are already contacting their real estate agents for that third mansion now that Peacock is in town). If Netflix is spending X amount of cash (and X in Netflix’s case is large, approaching $17 billion and maybe more over time), then Peacock may feel pressure at some point. Another risk is that, as many have said, the service is simply late to the game. A third risk is opportunity cost: there has been some thought on the part of analysts that Sky simply was too much for what it is, and that different investments might generate a better ROI. All valid points.

But Comcast needs to have a streaming strategy, even if it means giving it away with ads in some cases. One smart thing is to differentiate between the full service and something that has less content – Comcast is indeed experimenting with charging more in monthly price to receive more programming compared to ad-supported alone. That will generate good data on consumer opinion/behavior, in my opinion, and Comcast is in the data business as much as anything else. Furthermore, building out a new brand in this space will be useful for the current pandemic as D+ has found out for some of its corporate parent’s celluloid offerings: NBCUni can seek out some synergy with the streamer if the quantity of accessible screens across the country remains volatile (and it is difficult to believe that volatility won’t increase in this respect).

Valuation

I touched briefly upon the company’s stock in terms of price action, but there’s also valuation to consider. Right now, the shares are very average in this regard (which means not that great) according to SA’s quote system.

It’s very difficult, given the pandemic, to assign a valuation to anything, especially a media concern. I would assume Comcast, like many other media stocks I follow, are going to offer better prices over the next twelve months as future data points come in. For one thing, the whole mess with multiplex exhibition is throwing everything off. For another, parks attendance will most likely be limited and volatile, with visibility on attendance and surprise closings/re-openings murky at best. Then there’s premium video-on-demand issues, and the resultant skirmishes with theater owners over that quagmire. At the center of it all is the new paradigm Peacock represents.

The company has a decent yield of 2% at the time of this writing, but I might expect that yield to go higher. Comcast is a long-term bet on content, viewer data and acquisitions (both recent and future), with the main risks centering on linear weakness and the need to reduce debt. I’m still bullish and am still long the stock, and I await the next earnings report at the end of the month…

Disclosure: I am/we are long CMCSA, DIS, T. 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.



Via SeekingAlpha.com