Charter Communications

Shares of US wireless carriers and tower firms traded lower after SpaceX claimed that it will use satellite dishes to build a wireless network capable of competing in the US wireless industry. SpaceX also claimed that it will launch 10 times as many V3 broadband satellites as V2.

Why it matters: SpaceX's potential impact on telecom is a key factor in valuations across the industry. We don't believe the firm's comments this quarter change the range of potential outcomes for the industry relative to our prior expectations. Several firms have attempted to build hotspot-type wireless networks like the one SpaceX is contemplating. The cable companies have incorporated public hotspots in tens of millions of broadband modems over the past decade, but these networks still deliver fundamentally limited signal coverage. We view SpaceX's comments as part of its battle with the US wireless carriers for network access rather than a credible threat. To fill areas satellites don't reach well without this access, SpaceX would likely need to build and manage a massive number of sites, just to attack a market that is well served today and not growing rapidly.

The bottom line: We maintain our fair value estimates and moat ratings for the US telecom and tower firms. Both wireless and broadband markets benefit from efficient scale attributes, but this moat source is most at risk in broadband. We recently cut our Comcast and Charter valuations, in part to reflect incremental Starlink competition. We don't expect Starlink to threaten the wireless operations of T-Mobile, Verizon, or AT&T for the foreseeable future. For US tower firms American Tower, Crown Castle, and SBA, we believe SpaceX offers more upside potential than downside risk. We don't factor upside from a SpaceX network buildout into our valuations, but the company would likely need tower sites to provide reliable signal coverage if it chooses to enter the wireless market.

We've again reduced our fair value estimate following a review of our long-term broadband penetration assumptions. Our new $280 estimate, down from $400, implies an enterprise value of about 6.5 times our 2026 EBITDA estimate and a free cash flow yield of roughly 11% based on 2025 results. Free cash flow has declined as Charter has ramped up network expansion and upgrade initiatives. Management believes capital spending peaked in 2025 and will decline sharply beyond 2027 as these projects are completed.

We assume Charter remains a dominant internet access provider in its service territory while also commanding solid pricing power, especially in the later years of our forecast as the firm shifts its emphasis away from increased customer penetration and the competitive environment reaches equilibrium.

We have grown less optimistic about Charter’s ability to add customers over the longer term as wireless carriers continue to take share and fiber networks expand. Charter’s network expansion efforts should offset some of this increased competition, but we expect residential customer penetration of homes passed will drop to 42% in 2030 from 51% at the end of 2025. We had previously expected penetration to begin stabilizing and remain above 40% in 2035. We now model that figure at a bit above 35%.

We still expect pricing to remain rational, given the massive capital investments competitors are making, but we have recently grown concerned about price competition. As a result, we now expect revenue per broadband customer to be flat in 2026. Entering the year, we had expected revenue per customer to grow 2.5%. We assume modest growth returns in 2027, reverting to 3% annually for the remainder of our forecast.

In total, we expect Charter to serve about 9% fewer customers in 2030 than in 2025, but that revenue per customer will increase slightly, including a growing contribution from the wireless business. The net result is that we forecast revenue to increase by less than 1% annually through 2030, with year-to-year volatility driven by political ad revenue.

Because of the high cost of television content, margins should naturally improve as the television business shrinks. Management’s focus on reducing the cost of serving customers should also lift profitability over the longer term. However, Charter’s aggressive push into the wireless business will hinder margin gains. We expect these puts and takes to offset each other. Still, the shrinking size of the customer base will likely hurt operating leverage. We assume the EBITDA margin drops below 38% in 2030 and to 36% in 2035, down from the 40% range in recent years.

Charter has pursued several state and federal broadband subsidy programs and is now building aggressively in rural areas. Management also expects to spend around $5 billion in total through 2027 to upgrade its existing cable footprint to the next iteration of DOCSIS technology, which will enable multi-Gbps broadband speeds. We expect capital investment to follow management’s budget, averaging a bit less than $12 billion in 2026 and then falling below $10 billion in 2027. Charter believes it can run the business at $8 billion annual capital spending in 2028 and beyond, but we think this will prove aggressive as customer demand for fiber-based networks grows. We assume spending stays around $9 billion in 2028 and grows from there.

We believe Charter possesses a narrow moat based on efficient scale, offset in part by limited growth potential as rival networks improve. The firm also produces relatively meager returns on capital, thanks largely to the 2016 acquisitions that formed the company.

The majority of US homes today can receive fixed-line internet access service from only two providers: the traditional cable firms and phone companies. Building these networks requires heavy construction spending, limiting the threat of entry. Cable networks like Charter’s have provided a cost-effective platform to meet evolving customer demands. The costliest upgrade in the industry’s history, primarily undertaken in the late 1990s and early 2000s, involved the shift to a hybrid fiber-coax network architecture, a move that has paid handsome dividends. This architecture, coupled with steady technological advances, has enabled Charter and its cable peers to steadily add network capacity at a modest incremental cost.

By contrast, phone companies have only been able to meet customer demands through heavy investment to replace copper cables with fiber optics. Most phone companies had either been unable or unwilling to invest in fiber at scale, but that has changed in recent years. Most notably, AT&T started to invest aggressively in fiber expansion in 2021. The firm’s fiber network now reaches about 38 million locations, including 4 million acquired from Lumen, up from 21 million at the end of 2021, with plans to reach up to 60 million by the end of this decade.

Charter likely faces fiber competition across approximately 60% of its footprint, and that percentage will likely increase to about 75% by the end of the 2020s. While several firms seem intent on building aggressively, we suspect that the pace of fiber construction across the US will slow as the remaining locations yet to be upgraded to fiber are increasingly high-cost.

In addition to fiber competition, fixed-wireless access has started to chip away at the broadband market. T-Mobile and Verizon have taken the lead in marketing FWA, while AT&T has made the service available to pockets of its footprint. With a huge swath of wireless spectrum coming online over the past couple of years, the wireless carriers have substantial fallow capacity and huge investments in licenses and equipment looking for a return. T-Mobile now serves 8 million FWA customers, while Verizon serves 5 million, and both firms hope to roughly double those figures by 2028.

FWA will likely prove adequate to serve a portion of customers, pressuring penetration levels and returns on capital for other broadband providers like Charter. However, we’re skeptical that fixed wireless will take significant market share over the medium- or longer term, as growing demand from core smartphone users and other mobile applications limit the network capacity the carriers are willing to allocate to broadband. We also suspect a large portion of FWA customers will include new use cases, like construction sites. Verizon reports that 40% of its FWA customers are businesses, while more than 90% of Charter’s broadband customers are consumers.

Despite the influx of competition from fiber network builders and wireless providers, we expect broadband price competition to remain rational. Returns on capital for fiber projects are not strong, even among relatively mature firms. Fiber builders have no incentive to cut prices aggressively to increase customer penetration. Doing so would quickly invite a competitive response from the cable companies in the short term and devalue the market over the long run—hallmarks of a market influenced by efficient scale dynamics.

We also expect pricing discipline among fixed-wireless providers. Smartphone data traffic generates far more revenue per unit of network capacity consumed. The wireless carriers will prioritize serving core smartphone customers to preserve this business while looking for new applications that leverage the mobility wireless networks provide.

Charter’s superior network position has enabled it to steadily gain market share over the past decade. Half of the households and businesses in its footprint subscribe to at least one Charter service, a level of penetration that allows for very attractive returns on capital. While incremental fiber competition will put pressure on customer penetration, we expect Charter to maintain returns on capital that exceed its cost of capital over the next 10 years.

Like its cable peers, Charter’s networks provide a platform to easily meet customers’ growing bandwidth demands, which should drive stable market share and strong cash flow.

As the second-largest US cable company, Charter has the scale to adapt quickly. The firm is rapidly expanding into the wireless business, helping to cement customer relationships.

Charter's television offering is unique, bundling multiple streaming services with its traditional service. Rivals will find this position challenging to replicate.

Charter has a reputation for poor customer service. As high-quality alternatives emerge, including fixed-wireless and new fiber networks, customers will continue to jump ship.

A heavy debt load has limited Charter’s financial flexibility and could spell serious trouble for shareholders if recent business struggles worsen or if the capital markets dry up.

Charter expects to slash network investment after 2027, but it will still lag fiber networks' capabilities. Migrating to fiber will eventually swamp the firm's resources.