Over the last six months, Comcast shares have sunk to $27.94, producing a disappointing 9.2% loss - worse than the S&P 500’s 2.1% drop. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Comcast, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Comcast Will Underperform?

Even with the cheaper entry price, we're cautious about Comcast. Here are three reasons you should be careful with CMCSA and a stock we'd rather own.

1. Decline in Domestic Broadband Customers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Comcast, our preferred volume metric is domestic broadband customers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Comcast’s domestic broadband customers came in at 31.26 million in the latest quarter, and over the last two years, averaged 1.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Comcast might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Comcast’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 15.1% for the last 12 months will decrease to 11%.

3. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Comcast’s ROIC averaged 2.8 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Final Judgment

We see the value of companies helping consumers, but in the case of Comcast, we’re out. Following the recent decline, the stock trades at 7.8× forward P/E (or $27.94 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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