Over the past six months, Comcast’s stock price fell to $23.92. Shareholders have lost 13.3% of their capital, which is disappointing considering the S&P 500 has climbed by 7.5%. This may have investors wondering how to approach the situation.
Is now the time to buy Comcast, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Comcast Will Underperform?
Despite the more favorable entry price, we’re cautious about Comcast. Here are three reasons we avoid CMCSA, plus one stock we’d rather own.
1. Decline in Domestic Broadband Customers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Comcast, our preferred volume metric is domestic broadband customers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Comcast’s domestic broadband customers came in at 28.65 million in the latest quarter, and over the last two years, averaged 2.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Comcast might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Comcast’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 13.6% for the last 12 months will decrease to 10.5%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Comcast’s ROIC averaged 1.2 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Comcast, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 6.8× forward P/E (or $23.92 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than Comcast
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