Comcast has earned an upgrade from Wells Fargo analyst Steven Cahall, who raised his stock rating from “underweight” to “equal weight” on Monday despite a bearish outlook on the cable, media and tech giant’s entertainment unit NBCUniversal. He also raised his stock price target on the company, led by chairman and CEO Brian Roberts, by $8 to $38.

“We’re less negative on Comcast’s cable outlook with slower earnings before interest, taxes, depreciation and amortization (EBITDA) growth, but also clearer capital expenditures (capex),” he explained. “We’re more negative on NBCU and below Street on free cash flow. Net/net we now think Comcast is de-risked and fair value is around $38.”

Cahall said he was “moving NBCU to a bearish media outlook,” explaining: “We’re more aggressively cutting numbers at NBCU to bake in around 7 percent annual sub declines, weakness in entertainment scatter ad pricing (recession, AVOD) and peak losses at Peacock. Our NBCU adjusted EBITDA for 2023/24 is $4.6 billion/$5.9 billion, which is 25 percent/9 percent below Street. NBCU EBITDA down 19 percent in ’23 is similar to what we estimate for peers like Disney linear networks, Warner Bros. Discovery networks, excluding synergies, and Paramount Global TV Media. We reset our NBCU valuation ex-theme parks to around seven times enterprise value/EBITDA, which is consistent with our views on Warner Bros. Discovery and Paramount, reflecting tough linear themes and slower improvement at streaming.” And he noted: “We’re not sure when Peacock breaks even.”

The Wells Fargo analyst noted “lots of NBCU optionality” though. “While we’re bearish on NBCU operating trends, we think it will benefit from Comcast’s strong balance sheet,” he wrote. “The media sector is heading into a very challenging period of weaker streaming results and much faster linear degradation. While we think NBCU faces those challenges, it can leverage Comcast’s strong balance sheet opportunistically.” And he highlighted: “Comcast’s strong balance sheet gives it options for NBCU that peers lack.” 

Cahall then provided some color on and examples of what such opportunities could look like. NBCU could, for example, add “sports rights that become unaffordable to peers,” he argued, mentioning the NBA “near-term, maybe more NFL longer-term.” Comcast/NBCU could also end up “making a push to acquire Hulu from Disney, which could be more likely given management changes,” the analyst added. Finally, he noted that the company is likely to be “patiently evaluating consolidation opportunities.”

The Wall Street expert is less negative on the core Comcast cable business though despite various challenges. “We’ve been long-time bears on Comcast. Some of the theses have played out, with cable derating as competition for subscribers has advanced,” Cahall wrote, predicting “modestly negative” broadband net additions in 2023 and higher video losses ahead. “While broadband competition is increasing, it’s not creating all the bad trends we had feared. ARPU is holding up better, and we think benefiting from cord-cutting” and other trends, he concluded, adding that capex “is well below our prior fears.”

Concluded Cahall: “The result is a less negative outlook for free cash flow… Better clarity on free cash flow make us more constructive. … NBCU will likely be a drag, but there is sufficient free cash flow support in our view.”

Comcast shares were up more than 1 percent in Monday pre-market trading at $36.28.