Why CHTR Share Price Just Lost a Quarter of Its Value Overnight

When a stock loses 25% of its value in a single session, a certain silence descends upon it. Charter Communications lost $61.65 per share by Friday’s close, closing the day at $180.13, a 25.5 percent decline that is the worst in the company’s history for a single day. A new 52-week low was also reached at the intraday low of $178. The decline has the feel of a larger narrative developing rather than just one poor earnings day for a stock that reached as high as $437.06 during the previous year.

The trigger was fairly simple. Charter lost 120,000 internet users in the first quarter, which was worse than the roughly 100,000 Wall Street had anticipated and double the 59,000 it lost during the same time last year. Comcast had reported a smaller-than-anticipated broadband loss of 65,000 just the day before, so that number hit harder. Investors had briefly given themselves hope that the worst of the loss of cable subscribers was abating. Charter‘s loss swiftly closed that window, and the industry as a whole felt the chill. Comcast ended the day down almost 13%.

One of the reasons the reaction was so harsh was that the numbers beneath the headline were inconsistent. Revenue was $13.6 billion, a 1% decrease from the previous year but still marginally higher than the $13.55 billion analysts had predicted. In fact, diluted EPS increased from $8.42 to $9.17 thanks to a vigorous buyback program that has significantly decreased share count over time. With a base of 12.1 million, mobile lines increased by 368,000. That was insufficient. The wound is in broadband, which is also the source of profit.

During the call, CEO Chris Winfrey sounded calm but direct. He informed investors that Charter was “very focused on returning to broadband growth” and that it was still “confident” in its ability to compete. Part of the issue is that you have likely heard cable executives use this phrase for the past two or three years. Customers at the lower end of the market continue to be siphoned off by T-Mobile and Verizon’s fixed wireless. In the suburbs where Charter used to rule, fiber providers are making more of an effort. There are fewer move-ins to turn into new accounts because the housing market is slow. It seems as though the structural pressure is no longer a phase.

Additionally, the timing seems awkward. Charter is currently attempting to finalize its $34.5 billion purchase of Cox Communications, which is being presented as the solution to precisely this type of competitive pressure. The deal was approved by the FCC in February, and according to management, a summer close is still the goal, pending approval from California. The estimated run-rate operating expense synergies were increased from $500 million to “at least $800 million,” according to CFO Jessica Fischer. Investors appear to be responding to the fact that scale does not immediately address the sales issue. On the same day, Liberty Broadband, a significant shareholder in Charter, saw a 26% decline.

As this develops, it’s difficult to avoid getting the impression that something bigger is being repriced—not just Charter, but the entire cable bundle as a business. Real money is still thrown off by the company. Despite $2.86 billion in capital expenditures, free cash flow for the quarter was $1.4 billion. For any S&P 500 name with this kind of subscriber base, the trailing P/E currently stands at about 4.87. It will be referred to as a value trap by some analysts. Others will recognize the opportunity. Vikash Harlalka of New Street called the broadband and ARPU numbers “weak” while EBITDA was “fine”—a neat synopsis of a quarter that doesn’t really fit into a single narrative. Which read holds up will likely be determined by the next two quarters, particularly how the Cox integration begins to land.