Cable One’s stock price has taken a beating over the past six months, shedding 38.6% of its value and falling to $158.63 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Cable One, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Cable One Will Underperform?
Even though the stock has become cheaper, we're swiping left on Cable One for now. Here are three reasons we avoid CABO and a stock we'd rather own.
1. Inability to Grow Residential Data Subscribers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Cable One, our preferred volume metric is residential data subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Over the last two years, Cable One failed to grow its residential data subscribers, which came in at 1.03 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Cable One might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Cable One’s revenue to drop by 3.2%, close to its 4.2% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
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, Cable One’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Cable One falls short of our quality standards. After the recent drawdown, the stock trades at 4.3× forward P/E (or $158.63 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 the most entrenched endpoint security platform on the market.
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