The cable industry benefited from the growing importance of broadband during the pandemic, but it could be harder for the companies to keep up that momentum going forward.

Wells Fargo analyst Steven Cahall is taking a more cautious view of cable stocks, arguing that competition is increasing and it will be more difficult for companies to capture strong growth given that household penetration is already so high.

“Looking to the back half of the year, we begin to see cracks in the residential broadband growth story,” he wrote.

Cahall cut his rating on shares of Charter Communications Inc.
CHTR,
-4.83%

by two notches, to underweight from overweight, and lowered his rating on Cable One Inc. shares
CABO,
-2.73%

by one notch, to equal weight from overweight. He cut his price targets on both those names, as well as on underweight-rated Comcast Corp.
CMCSA,
-4.70%

and equal-weight-rated Altice USA Inc.
ATUS,
-3.95%

 

One concern for cable companies is that telecommunications players like AT&T Inc.
T,
-1.18%

are ramping up their fiber efforts, which increases competition.

“AT&T has some 40%+ overlap with Charter’s footprint so its aggressive fiber plans will not go unnoticed by customers and investors,” Cahall wrote. “Charter will look to match incoming competition with upgrades of its own (e.g. high split), which we think will increase capital intensity and put some pressure on free-cash flow growth.”

Charter shares are off 4.2% in Friday trading.

Altice USA serves as a “scary” example, in Cahall’s view. Its stock price has roughly halved this year despite a far less dramatic drop in earnings estimates, meaning that most of the stock’s fall could be attributed to multiple compression. The stock has been subject to several recent downgrades.

“Broadband net adds have driven the derating, proving that a change in the net add outlook (perhaps combined with high leverage) – can cause a big change in the long-term terminal value,” he wrote. “Altice USA’s footprint, which is highly competitive, is arguably what Charter’s and Comcast’s could look like by 2023-24,” though Cahall notes that both Charter and Comcast have executed better and he doesn’t expect either to show negative net additions “any time soon.”

Altice USA shares are off 2.1% Friday, while Comcast shares are down 4.0%.

“We think Comcast is a risky stock because if we’re right on cable then the internet slowdown could happen amidst [NBC Universal’s] expensive multiyear pivot towards streaming,” Cahall wrote, in reiterating his overall bearish view on the company.

NBC Universal is a subsidiary of Comcast.

As for Cable One, Cahall predicts that the company could be “far less impacted by competition” due to the company’s rural footprint. Still, he sees risks to Cable One’s valuation, owing to “broad-based sector headlines around net adds, 5G and pricing concerns.”

Shares of Cable One are off 3.4%.

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