CHTR Stock Forecast: Robust and Scalable Business
This CHTR Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.
Highlights
- CHTR earned revenue of $13.66 billion growing by 0.5% in Q2 2023 compared to Q2 2022. The net income decreased by 16.9% to $1.22 billion, mainly due to the higher interest expense and losses on investments.
- Residential Internet and Commercial businesses contributed most to the total revenue and maintained a continuous and stable growth rate. Mobile business has the greatest growing potential and the rapid growth is expected to sustain in the next few years.
- CHTR’s current strategy is focused on evolution, expansion, and execution. Specifically, evolution includes Spectrum One, Multi-gigabit Speed Program, and Xumo while expansion is about rural builds to tap into unserved and underserved areas.
- CHTR has a moderate Performance compared with Peers in the telecommunication service industry. But its liquidity and solvency risks are worth noting as the expected debt needed to be paid will be half or even more than EBIT in the next few years.
- DCF values CHTR at $483, with an upside potential of 10%, compared with the stock price of $440.80 on October 19, 2023
Overview
Charter Communications, Inc. (CHTR) is an American telecommunications and mass media company branded as Spectrum. The company offers a wide range of products and services, including Spectrum Internet, TV, Mobile, and Voice, to over 56 million customers in 41 states by now. Founded by Barry Babcock, Jerald Kent, and Howard Wood in 1993, CHTR is headquartered in Stamford, Connecticut (in St. Louis, Missouri before 2012). As the second largest cable TV operator in the U.S. and the fifth largest telephone provider, CHTR had an annual revenue of $54 billion, with a net margin of 9%.
Robustness with High Growing Potential
Despite the pandemic and uncertain macroeconomics, CHTR handed out a great transcript in the year 2022. The total revenue was $54 billion, increased by $2.3 billion or 4.5% compared with 2021, mainly due to the increasing number of residential Internet, mobile, and commercial customers, and higher advertisement sales. The net margin was negative until the second quarter of 2016 and the positive trend has continued, updating at 9.4% at the end of 2022.
For the second quarter of 2023, the company earned revenue of $13.66 billion growing by 0.5% compared to the same period of last year, primarily due to a 3.2% increase in Enterprise revenue and a 28.5% increase in other revenue driven by higher mobile device sales. The net profit was $1.22 billion, reduced by 248 million or 16.9% compared to 2Q22, mainly due to the higher interest expense and losses on investments.
The decomposition of Y2022 revenue shows that residential revenue dominated, accounting for 76% of the total, followed by commercial revenue at 13%, mobile revenue at 6%, advertising sales at 3%, and others at 2%. Specifically, the residential revenue includes revenue from the Internet (54%), video (42%), and voice market (4%). The commercial revenue also can be segmented into revenue from small and medium businesses (62%) and enterprises (38%).
Compared to the year 2021, how has revenue from these different sectors changed, ending at the final positive result in 2022? What are the engines driving revenue growth? The hint is situated on the Y2022 10-K report. Digging down the financial reporting section, we can see except Video and Voice segment under the residential revenue category, all of the rest of the market had increased to various extents. Particularly, Mobile revenue had soared by 39.7%, followed by advertising sales by 18.1%, while other growing sectors had a digit growth rate.
Generally speaking, the increased revenue can be mainly attributed to the increased number of customers or services. For example, Residential Internet customers grew by 275,000 or 1% in 2022 compared to 2021; SMB customers grew by 64,000 or 3%; The number of mobile lines also rose by 1,728,000 or 48.5%. Besides, thanks to the promotional roll-off and rate adjustments, CHTR also gained the benefit from the rate and product mix changes in the residential market, which significantly offset the loss because of the decreased number of residential video and voice customers.
Enterprise revenues increased by $104 million or 4% primarily due to an increase in Internet PSUs by 12,000. Advertising sales revenues grew by $288 million or 18.1% mainly due to the increase in political revenue.
The below chart delineates the revenue growth rate of different sectors from 2019 to 2022. Here are some trends worth noting.
- Residential Internet, as the most lucrative business, performed greatly and maintained a continuous growth rate.
- The residential Video and Voice segment didn’t perform well.
- Commercial business also maintained a stable growth rate, averaging at 3.5%.
- The dramatic growth in advertising sales is surprising but this growing potential is unstable and depends on situations.
- Mobile business has maintained rapid growth, and according to the company’s future strategic plan, this rapid growth will continue in the next few years and drive the company’s total revenue growth.
To sum up, Residential Internet and Commercial businesses contributed most to the total revenue and maintained a continuous and stable growth rate. Mobile business has the greatest growing potential and the rapid growth is expected to sustain in the next few years.
Strategical Growth: Evolution + Expansion
As stated in the Y2022 10-K report, “CHTR’s current strategy is focused on the evolution of the network, expansion of footprint, and the execution of high-quality operations, including customer service.” It clearly points out the direction of the development and also the future growing engines.
Evolution: Innovation + Collaboration
- Spectrum One: Launched in October 2022, Spectrum One is the country’s first integrated wired and wireless connectivity product, providing a better and faster experience. It combined Spectrum Internet, Advanced WiFi, and Unlimited Spectrum Mobile to deliver broadband speeds of up to 1 gigabit per second, tens of millions of WiFi access points, 5G unlimited mobile services, etc. By the end of 2022, 3M of 56M (5.4%) had shifted to the converged connectivity product and the potential remains strong.
- Multi-gigabit Speed: Over the following three years, CHTR intends to upgrade its network. Over 85% of the footprint is anticipated to experience 5 Gbps download speeds and at least 1 Gbps upload speeds by the end of 2025. The more rapid speeds will be provided in attractively priced bundles with Advanced WiFi and Spectrum mobile products.
- Xumo: On April 27, 2022, CHTR and Comcast announced a 50/50 joint venture to develop a next-generation streaming platform, offering an all-in-one portal to an entertainment universe. Although the platform is free to use and does not require a subscription, placing adverts has allowed it to increase revenue by 300% in recent years. CHTR, Xumo is a strategic layout that can become a potential star with high market share and high market growth.
Expansion: Tap into Unserved and Underserved Passings
CHTR intends to invest more than $6 billion as part of a strategic expansion, with a portion of that sum anticipated to be offset by government funding, such as more than $1.7 billion in support awarded through December 31, 2022, in the Rural Development Opportunity Fund (“RDOF”) auction and other federal, state, and municipal grants. More than a million prospective customers in underserved areas may now access the product mix thanks to these rural developments, which also enable the company to achieve long-term infrastructure-style returns with solid growth and profit visibility.
In 2022, 120,000 new subsidized rural passings are built with an average of penetration of passings opening at least six-month about 40%. In 2023, the corporation is anticipated to take part in the $42.5 billion Broadband Equity, Access and Deployment (BEAD) Program. The increased footprint promotes future revenue development and client expansion.
Moderate Performance Compared with Peers
CHTR’s competitive position can also be affirmed by comparing profitability with its peers using GuruFocus. As a profitable company in the telecommunication services industry, CHTR had a gross margin of 45.33%, worse than 54.57% of similar companies, and had a net margin of 8.48%, better than 61.86% in the second quarter of 2023. While the company isn’t significantly outperforming its peers, it clearly has better cost management to increase net profit.
However, in terms of solvency, CHTR’s Debt to EBITDA was 4.76, worse than 77.74% of peers, indicating that CHTR has considerable financial risks as its Debt has exceeded EBITDA by about 5 times. Also, its poor liquidity can be reflected in the current ratio, which was worse than 93.47% of its counterparts. CHTR has considerable risks in paying short-term obligations to run the business and by now it’s unable to pay the current debts as they come due.
From the second quarter 2023 investor presentation, we can see the company does have huge pressure on paying obligations. The 2022 EBIT (earnings before interest and tax) was just $11.96 billion, which companies can use to cover the debts, but the expected debt needed to be paid will be half or even more. Therefore, I am quite concerned about the company’s financial status in the next few years.
DCF Values CHTR at $483
The DCF analysis shows that CHTR’s intrinsic, 1-year, and 2-year stock price should be around $483, $509, and $534 respectively, which is 10%, 15%, and 21% upside potential from the price of $440.80 on October 19, 2023. It’s clear that the CHTR stock price is undervalued and is worth buying.
The DCF model is built based on the following assumptions:
- The risk-free rate is 4.70% according to the US 10-year zero coupon bond as of October 2023. The risk premium of 5.5% comes from the average market risk premium in the U.S. from Statista.
- Beta 1.13 is calculated based on the slope of the change of monthly CHTR stock price and S&P500 price from 2018 to 2023.
- The cost of debt is calculated as a weighted average interest expense of 5.1% and lease discount rate of 3.7%, concluding at 5.1%.
- The tax rate is the effective tax rate of 12.0% derived from the 10-K 2022.
- The terminal growth rate is assumed at 3.0%, the same as the growth rate of US GDP.
Due to the uncertainties in the macroeconomic environment, it is difficult to accurately predict the impact of relevant risk factors such as epidemics and wars, and the assumption may not be valid. A sensitivity matrix is created to show the impacts on CHTR’s intrinsic stock price by altering WACC (weighted average cost of capital) and terminal growth rate.
Viewpoints from Analysts Community
Based on Yahoo Finance, there were 26 analysts presenting recommendation trends on October 2023, among which 5 recommended Strong Buy, 12 Buy, and 9 Hold. The recommendation rating is 2.6 between Buy and Hold. The average price target from 26 analysts is around $487.82, with a low of $300 and a high of $665.
From TIPRANKS, there are 8 Buys, 7 Holds, and 1 Sell from 16 analysts’ ratings in the last 3 months. The expected stock price is $494 within the lowest $325 and the highest $582 price range.
Conclusion
I take a buy-side on CHTR stock because the DCF target price is $483, a 10% upside difference from the current price. The stock price growth is supported by the robust operation as the Residential Internet and Commercial business contributed most to the total revenue, maintaining a continuous and stable growth rate; Mobile business has the greatest growing potential and the rapid growth is expected to sustain in the next few years. The Evolution, Expansion, and Execution strategy clearly points out the development direction and demonstrates the huge business scale. However, the liquidity and solvency risks need to be concerned and will be likely to negatively impact the financial status.
Worth noting is that the AI-driven stock selection by I Know First indicates a strong bullish signal for CHTR stock on the one-year market trend predictions, aligning with my perspective. The light green for short-term forecasts suggests a mildly bullish stance, while the darker green represents a strong bullish signal for the one-year forecast.
Past Success with CHTR Stock Forecast
I Know First has been bullish on the CHTR stock forecast in the past. On July 10th, 2023 the I Know First algorithm issued a forecast for CHTR stock price and recommended CHTR as one of the best S&P 100 stocks to buy. The AI-driven CHTR stock prediction was successful on a 3-month time horizon resulting in more than 19.57%.
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Please note-for trading decisions use the most recent forecast.