'The media sector is heading into a very challenging period of weaker streaming results and much faster linear degradation,' says Wells Fargo's Steven Cahall. But the entertainment unit 'can leverage Comcast's strong balance sheet opportunistically.'
Cahall said he was “moving NBCU to a bearish media outlook,” explaining: “We’re more aggressively cutting numbers at NBCU to bake in around 7 percent annual sub declines, weakness in entertainment scatter ad pricing and peak losses at Peacock. Our NBCU adjusted EBITDA for 2023/24 is $4.6 billion/$5.9 billion, which is 25 percent/9 percent below Street. NBCU EBITDA down 19 percent in ’23 is similar to what we estimate for peers like Disney linear networks, Warner Bros.
The Wells Fargo analyst noted “lots of NBCU optionality” though. “While we’re bearish on NBCU operating trends, we think it will benefit from Comcast’s strong balance sheet,” he wrote. “The media sector is heading into a very challenging period of weaker streaming results and much faster linear degradation. While we think NBCU faces those challenges, it can leverage Comcast’s strong balance sheet opportunistically.
Cahall then provided some color on and examples of what such opportunities could look like. NBCU could, for example, add “sports rights that become unaffordable to peers,” he argued, mentioning the NBA “near-term, maybe more NFL longer-term.” Comcast/NBCU could also end up “making a push to acquire Hulu from Disney, which could be more likely given management changes,” the analyst added. Finally, he noted that the company is likely to be “patiently evaluating consolidation opportunities.
The Wall Street expert is less negative on the core Comcast cable business though despite various challenges. “We’ve been long-time bears on Comcast. Some of the theses have played out, with cable derating as competition for subscribers has advanced,” Cahall wrote, predicting “modestly negative” broadband net additions in 2023 and higher video losses ahead. “While broadband competition is increasing, it’s not creating all the bad trends we had feared.
Concluded Cahall: “The result is a less negative outlook for free cash flow… Better clarity on free cash flow make us more constructive. … NBCU will likely be a drag, but there is sufficient free cash flow support in our view.”
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