Over the last couple of years, the technology industry has witnessed a generational sense of euphoria thanks to the rise of artificial intelligence (AI). Companies developing software, semiconductor chips, and robots have been some of the biggest beneficiaries of AI.
But not every winning opportunity in the tech sphere needs to touch AI. While I've written about the merits of investing in the telecommunications space, I'll concede that telco businesses aren't the most exciting.
After all, given the rise of streaming services and the commoditized product offerings from internet service providers (ISPs) and cable operators, doesn't investing in telecommunications seem like a poor choice? Well, maybe not.
Let's explore one communications company that Warren Buffett holds a position in. While it's not Berkshire Hathaway's most well-known stock, I think there are some good reasons to take a look at this one -- especially now as the U.S. presidential election is only 50 days away.
How does the election influence the communications industry?
Have you ever watched a sports game on television and taken note of just how many advertisers there are on your screen? And no, I'm not talking about commercials. I'm talking about the game itself. Whether it's baseball, basketball, or lacrosse, viewers can easily spot logos from advertisers on the court, the outfield walls, and more. In fact, most professional sports stadiums are named after a sponsoring company.
In a way, politics isn't really any different than traditional business. Politicians spend time crafting their image (brand appeal) and often look for donations from voters as well as businesses to support their campaigns. In turn, candidates running for political office spend a lot of time and money creating campaign material sent through the mail, displayed on billboards, featured on radio, and (drum roll please!) broadcast on television.
Some of the biggest beneficiaries of political advertising are media businesses.
Image source: Getty Images.
Where are political advertising dollars going in 2024?
Back in December, I wrote a piece about political advertising. In the article I cited a report from AdImpact that forecast roughly $10.2 billion would be spent on advertising during the 2024 election cycle. AdImpact's updated report from June is now calling for a slightly revised figure of $10.7 billion geared toward political advertising this year.
Taking note of the size of the political advertising market is just one piece of the puzzle, though. Investors need to go deeper and explore where these dollars are being allocated. Of course, it's natural to think the majority of campaign dollars are focused on digital channels through Alphabet's YouTube and Google and Meta Platforms' Instagram and Facebook.
However, the table below illustrates AdImpact's estimates by medium:
| Channel | Amount |
|---|---|
| Broadcast | $5.4 billion |
| Cable | $1.9 billion |
| Connected TV (CTV) | $1.5 billion |
| Digital | $1.1 billion |
| Radio | $0.4 billion |
| Network cable | $0.3 billion |
| Satellite | $0.1 billion |
| Total | $10.7 billion |
Data source: AdImpact
As investors can see, the overwhelming majority of political advertising dollars is actually being geared toward more traditional facets of the telecommunications industry such as broadcast and cable television.
And the Warren Buffett stock I'm talking about is...
The under-the-radar Warren Buffett stock that I think could be a big winner thanks to the upcoming election is Charter Communications(NASDAQ: CHTR).
For the six months ended June 30, Charter generated a total of $788 million in sales from advertising -- an increase of 7% year over year. In both earnings reports, management highlighted political campaign spending as the catalyst driving growth.
But despite its nearly 32 million customers, Charter has faced the same headwinds as many of its cohorts in the communications realm. The rising popularity of streaming and intense competition driven by price makes it challenging to acquire new customers and retain existing subscribers. Unsurprisingly, the stock is down 22% so far in 2024 and nearly 57% over the last three years.
As you can see in the chart below, Charter's price-to-earnings (P/E) multiple of 10.8 is among the lowest in its peer set, and it isn't particularly close. Furthermore, its forward P/E of just 10 is less than half that of the S&P 500.
CHTR PE Ratio data by YCharts
Now, I know it may seem like Charter stock might only be a good buy in anticipation of a sharp rebound thanks to renewed life in the advertising business driven by the election. Furthermore, since election cycles do not occur every single year, Charter's growth might feel fleeting. I don't necessarily see things that way, though.
Even though cable services are declining in popularity as streaming becomes more common, Charter's broadband utility is unlikely to see a material drop in demand anytime soon. Moreover, even though advertising sales are non-recurring, the majority of Charter's business is concentrated in more non-cyclical services, which positions the business well for the long run.
The high subscription-based revenue business has helped generate rising free cash flow and earnings before interest, taxes, depreciation, and amortization (EBITDA) despite a hefty competitive landscape. All told, Charter still has a pretty financially strong operation.
To me, Charter is a classic value stock opportunity. The hefty sell-off in the stock seems overblown from my perspective and I think investors might want to consider scooping up shares in Charter stock right now. It looks materially discounted to both its peers and the broader market and I think investors are underappreciating the company's growth prospects in the long run.
Should you invest $1,000 in Charter Communications right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.
