2023-03-22 09:29:30 ET
Summary
- Although Liberty Global seems to be growing, rising competition and competitors with advanced technology might put significant pressure on the margins.
- Historically, the company has incurred significant losses.
- Therefore, investing in a loss-making business whose cash flows are consistently dropping might not provide a margin of safety to the investor.
Liberty Global ( LBTYA ) provides connectivity and entertainment services to residential and business customers. The company provides market-leading connectivity services through its next-generation network that connects retail and wholesale customers. In an industry where internet speed and price are the primary driving factors, the company gets benefitted significantly due to its high-speed industry-leading technology, which enables it to provide value for the best price.
From the last two years, the management has been aggressively seeking growth opportunities; as a result, the company has acquired sunrise communication group and entered into various joint ventures such as Nexfibre JV and VMO2 JV.
Although the company seems to be growing, rising competition and competitors with advanced technology might put significant pressure on the margins.
Historical performance
Liberty Global was founded in 2005 by media mogul John C. Malone; in the years that followed, Liberty Global grew rapidly through a series of acquisitions and strategic investments. The company expanded its presence in Europe, acquiring additional cable operators in various European countries.
In 2013, the company merged with Virgin Media; as a result, revenue had increased to $18 billion by 2014 , but since then, it has dropped significantly resulting from the sale of loss-making businesses and JV agreements.
Historically, the company has incurred significant losses; while in some years, it posted profits, but they are primarily attributed to one-time gains. Although the business had brought consistent operating losses, the cash flow from operations had been attractive, resulting from higher non-cash depreciation charges.
Also, note that, till 2018, the company has enjoyed strong and consistent cash flow, but from 2019 onwards, CFO has been dropping consistently (majorly due to the sale of the businesses); if the company sells its existing businesses, the CFO will further drop.
It should be appreciated that the management is aggressively buying back shares; as a result, the outstanding share count has dropped from about a billion in 2016 to nearly 490 million by 2022. Although the buybacks have led to a significant fall in the number of shares, the stock price has not seen any significant appreciation.
From 2009 until 2015, the stock rose more than 9 folds, producing ultra-high returns for the shareholders, but since then, the stock price has lost over 64% of its value and has been trading for about $20 per share. Although the share count has dropped significantly, the stock has not produced desirable returns to the shareholders due to consistently dropping cash flows and the increased threat of intense competition.
Strength in the business model
The company has diversified its operations in over 14 countries and among the various products and services, including video, broadband, telephony, and mobile. Also, the company holds significant market shares and enjoys strong brand recognition in the existing market.
By leveraging our existing fiber-rich broadband networks, we are in a position to deliver gigabit services by deploying the next generation DOCSIS 3.1 technology. DOCSIS 3.1 technology is an international standard that defines the requirements for data transmission over a cable system. Not only does DOCSIS 3.1 technology improve our internet speeds and reliability, it allows for efficient network growth. Currently, our ultra-high-speed internet service is based primarily on DOCSIS 3.1 technology, and we offer this technology in all of our markets. As of the end of 2022, both the VMO2 JV’s and the VodafoneZiggo JV’s broadband networks were capable of offering every customer of the VMO2 JV and the VodafoneZiggo JV gigabit internet speeds.
Annual report 2022
Also, the company has established the infrastructure to provide considerably high-speed internet services, which has been a significant competitive advantage for Liberty global.
Furthermore, the growing demand for high-speed internet and other digital services presents an opportunity for Liberty Global to expand its product offerings and increase revenue.
Risk factors
Liberty Global has a high level of debt, which can make it more vulnerable to economic downturns or changes in interest rates. Although debt maturity is beyond 2027, consistently dropping EBITDA margins might affect the financial position.
Furthermore, the company faces intense competition from other cable and telecommunications companies, which could impact its market share and profitability. The company operates in a rapidly changing industry, where if the competitors came up with new technology, the company could lose significant market share.
Also, as the company is selling some of its businesses; as a result, EBITDA and CFO may drop, which can affect the leverage ratio, resulting in a higher cost of funds. As the competitors adapt to the new technology, the company might face significant pressure on its margins in the upcoming years.
Recent development
In the year 2022, revenue has dropped significantly from $10.3 billion in 2021 to about $7.1 billion by 2022; such a drop is primarily due to U.K. JV transactions and decreased revenue from broadband services.
Also, over the period, the company has produced over $2.8 billion in cash flow from operations, which has been used to reduce debt and repurchase shares.
Currently, the company is trading for about $9 billion, whereas it has produced over $2.8 billion in CFO. Consider that the company has historically brought significant losses, and to maintain its business, it had to sell or dispose of some of its businesses.
I believe the business might face substantial backdrops resulting from rising competitive pressure and a huge debt. Therefore, investing in a loss-making business whose cash flows are consistently dropping might not provide a margin of safety to the investor. I assign SELL rating to Liberty Global stock.
For further details see:
Liberty Global: Do Not Provide Margin Of Safety