November 07, 2022 - 7:23pm EST by
2022 2023
Price: 9.84 EPS 0.283 0.615
Shares Out. (in M): 88 P/E 34.77 16
Market Cap (in $M): 863 P/FCF 0 0
Net Debt (in $M): 600 EBIT 0 0
TEV (in $M): 1,463 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.


WideOpenWest, Inc. provides internet, TV and telephone services to residential and commercial customers. The company has been pitched on VIC before. In the current episode of decimation across cable broadbands, the stock has become attractive again at this level. Already had been trading at near decade low valuations this year, the stock dropped another 10% on last Friday after a revised guidance expected internet broadband subscribers addition to be flat for 2022. Even though the cause of this flat subscriber growth is rooted in inflation/current macroeconomic environment (as opposed to the company not offeing attractive internet plans), holders still fled the stock, as if fate for the company is doomed. This excessive correction presents an even better entry for WOW.
As a cable broadband provider, WOW delivers internet, TV and phone services via a hybrid fiber-coaxial (HFC) network across 14 markets within Alabama, Florida, Georgia, Michigan, South Carolina and Tennessee. The company is also establishing its first Fiber-to-the-Home (FTTH) across three greenfield markets in Florida and South Carolina. WOW is known as a cable overbuilder. These guys in essence piggyback on the network already build by larger operators to install additional cable network that is a little faster and costs a little less to subscribers. 
The company IPOed in 2017 after previous CEO was replaced by the current CEO Theresa Eldi who transformed WOW to what it is today as a "internet first" company. WOW's operating performance since then has been positive. Internet subscribers steadily grew over time and margin keeps getting better because internet services has a high gross margin of over 90%. Last year in June 2021, WOW also divested 5 service markets in two deals for a combined proceeds of $1.8 billion (50% of then enterprise value). This eliminated a lot of leverage that the company had been carrying. Now smaller and nimbler, WOW has a 2.5x leverage (vs. peers at 4x+) and has the lowest leverage in all publicly traded broadband companies. Future sustaining and growth capex are all also expected to be funded by FFO, so the company has no need to re-lever out of necessity, but can do so if even more attractive opportunity comes about.
Notwithstanding the positives, cable broadbands and WOW is getting hammered in 2022 because (1) cable broadband operators as a group are, for the first time in history, losing broadband subscribers as of Q2/22. This is highly disconcerting because subscriber additions is the core metric that the market relies on to gauge cable broadband's future growth prospects. The loss of subscribers for cable broadband companies appear to some as a canary in the coal mine (2) cable broadband players are facing growing secular competitive pressure from Fixed Wireless Access (FWA) and Fiber-to-the-Home (FTTH) broadband technologies that are taking market share. These FWA and FTTH technologies are typically offered by telecom providers (Telcos). For cable broadband providers, the concern in the near term is whether subscriber growth would resume as the economy finds firmer footing; the concern in the long term is whether - or more precisely to what extent - will cable broadband growth dampen because of structural shifts in subscribers moving to FWA and FTTH.
The variant perception here is that (1) FWA and FTTH will not cannibalize away all of cable broadband growth in the future as the market seems to be pricing in at this depressed level; (2) WOW stands in good stead to grow its subscriber base because its service markets are more insulated from FWA/FTTH, and because the company has good internet plans in its legacy market and attractive growth projects in greenfield.
On the first point, though FWA and FTTH are indeed making headways in the US, the capacity of FWA to add subscribers is limited and FTTH still isn't in a fast adoption mode because of costs. These mean cable broadband will not lose subscriber growth overnight like the current pricing would suggest... Fixed Wireless Access (FWA) is essentially telephone 5G internet at home. Instead of having internet on your phone, telecoms now provides the same type of internet on a larger device analogous to the modem, your home devices can than connect to this modem like device to receive internet. FWA is gaining lots of subscribers because (1) its implemented in rural areas where people can't get cable internet; (2) people like the easy set up and its cheap ($40/month or so), so some are switching from cable internet to FWAs. The problem with FWA is that its 100-300 mpbs, so slower than cable internet, and telecom are only offering cheap FWA now because there is spare spectrum capacity. In the next few years, as more 5G phone users take up these 5G spectrum capacity, FWA internet speed and capacity should decrease, especially since data per gig is more profitable for 5G phone uses than for internet users. As for FTTH, network still needs to be build, and US currently lacks personnel to actually build FTTH networks, not to mention that it's still marginally more expensive than cable broadband, and penetration for FTTH is only around 50%. This points to FTTH being a persistent but dull competitive threat to cable broadband that would take years to overshadow cable broadbands.
On the second point, WOW is quite insulated from the competitive threats because FWA and fiber do not have big presence in WOW markets. WOW's plans charges $65 per month for 1GBps, Comcast and Charter all charge north of $70 per month. Tmus and Verizon have some FWA in WOW's areas, at less than $50 per month, but the service offering is limited and the speeds are much slower at low 100s of mbps. Analysts have been asking WOW every quarter on what sort of havoc FWA and FTTH has been wreaking in WOW's market. Management's feedback has been affirmatively the same, that both technologies are not great forces in WOW's markets. For FTTH, it's not even that WOW offer better plans, but the markets occupied by WOW offers third rate economics (more rural), so FTTH doesn't want to be in WOW's market. For FWA, the services are slower and the fine print in the sign up plans apparently says the speed is not great for streaming. That's another negative that WOW's cable broadbands does not have. In all, WOW's plans are competitive in its market. Nobody yet is taking WOW's lunch. 
On a multiple basis, WOW (and cable broadbands) are now trading at decade low valuations. A year ago, WOW sold five markets for 11x 2021 EBITDA. Now because of the more worrisome environment and because of a slight guidance revise down last Friday, WOW is trading at ~5x 2022 EBITDA. This depressive valuation is excessive, and should correct to a more normalized level of at least 7-8x once the cable broadband subscriber adds turn more positive as economic environment improves. If a deal happens, WOW should be able to get taken out at 8-9x, which equates to $19-$20/sh.
On a DCF basis, just using consensus projections for EBITDA and revenue, and capex numbers of $225 million per year over the next 3 years (per guidance) + discount rate of 10% and terminal growth rate of 5%, gets to a DCF value of north of $18/sh.
In short, this thing is worth high teens a share. The catalyst would be predominantly better subscriber addition numbers, which I think should start to come in sometimes in 2023 as the economy I expect turns incrementally better. If not, cable broadband including WOW could still be depressed, but it's doubtful that WOW will go much lower from here since it is flirting with sub 5x EBITDA when the company continues to improve margin and is expected to capture greenfield fiber subscribers as early as early 2023.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Subscriber growth

greenfield project success in early 2023

getting sold after the company goes back on a sales process

    show   sort by    
      Back to top