2. Altice USA, Inc. (NYSE:ATUS)
Operating Cash Flow (TTM): 2.58B
Number of Hedge Fund Holders: 42
Altice is a media company that provides services such as television, Internet access and cable TV to about 4.9 million residential customers in the US. Altice is one of the most popular cash-rich penny stocks among the 920 hedge funds tracked by Insider Monkey. Of the 920 funds in our data, 42 hedge funds reported having stakes in Altice USA, Inc. (NYSE:ATUS) as of the end of the September quarter, compared to 35 funds in the previous quarter. However, the stock in November tanked to record lows after Altice USA, Inc. (NYSE:ATUS) posted weak Q3 results, mainly due to broadband subscriber losses and higher operating costs.
Investment firm UBS also cut its price target on the stock to $9 from $19 after the results. However, the firm maintained its Buy rating on the stock.
Here is what MPE Capital has to say about Altice USA, Inc. (NYSE:ATUS) in its Q2 2022 investor letter:
“Two (very) costly mistakes I’ve made over the last twelve months have been my investments in Altice USA and Poshmark. Both are down over 50% from my initial purchase price. I not only poorly appraised business quality, I also incorrectly appraised the intrinsic value of both of these companies. It should rarely end up the case that we pay over intrinsic value, at worst case we should never lose money on an investment. I will dive into one of these mistakes below and maybe dive into the other in a future letter. My thinking when buying Altice USA was that they operate as a duopoly in their main footprint, the New York Tri-State area. They provide a needs-based service: internet, video, and voice services. I figured this is a very stable business with high barriers to entry. Management seemed competent as well based on historical capital allocation decisions. I didn’t fully appreciate at the time how poorly positioned they were relative to Verizon Fios, as well as how fiercely competitive the business can get on promotions and customer acquisition.
Altice offers hybrid fiber coaxial (HFC) while Fios offers fiber-to-the-home (FTTH). FTTH is a far superior product, which has led to some share loss to Fios in the parts of their footprint that overlap. There have also been some subscriber losses in their other footprint due to new cable entrants and fixed wireless offerings.
My original thinking was that the video business will go to zero overtime due to continued pressure from services like Netflix. In hindsight, I overstated their free cash flows excluding the video business due to difficulties disaggregating their business results. This FCF delta is a huge contributor to the difference between my current and original estimates of intrinsic value. Now, it’s possible that the video business doesn’t go to zero; however, I have a hard time envisioning that many households in ten years will still subscribe to linear television.
After losing some subscribers and facing some headwinds, they are now reinvesting many billions over the next few years in order to fiberize the majority of their footprint. I think this is a great plan and it will hopefully cement their position as a true duopoly in the New York TriState area. However, in their other major footprint, new fiber entrants are coming in and competition will only intensify. There are also some new entrants entering this space like Starlink satellite internet and fixed wireless internet from tier one mobile carriers. I think these will generally be more expensive and inferior to FTTH; however, they may end up putting some pricing pressure on Altice overtime.”
