We downgrade our recommendation on Virgin Media Inc. (VMED) to Neutral, ahead of its second quarter of 2011 financial results, backed by the recent surge in stock price, which moved up by nearly 57% last year.
Meanwhile, Virgin Media continues to perform well with solid top-line growth and higher operating income, supported by customer’s preference toward the company’s bundled services. The customers are now more inclined toward high-margin premium services, which offer faster speed. At present, 63% of its total customers subscribe to the company’s triple-play services. In the first quarter of 2011, quad-play penetration climbed 12% year over year. Moreover, Virgin Media’s Business segment performed exceptionally well, adding new enterprises to its high-speed fiber network. At the same time, we believe all these positives are already reflected in the current valuation.
From last December, Virgin Media has started offering a next-generation web TV platform to its subscribers. Virgin Media is utilizing TiVo Inc’s (TIVO) industry leading set-top boxes for this innovative offering. This innovative converged digital TV platform provides improved graphics, on- demand video content, catch-up TV service, web-based applications including games and personal video recorder. In a nutshell, Virgin Media’s new product will integrate the Internet and live TV on one screen through fiber-optic cable.
However, recently, Virgin Media warned about the softness of the U.K. broadband market since the customer confidence index in the U.K. is at low level. This may restrict the company to increase the proposed service rates in August 2011. In June 30, 2011, Virgin Media received a setback when the Advertising Standards Authority (ASA) of the U.K. ordered the company to stop its online advertising campaign in which Virgin Media has criticized its competitors for not offering their committed bandwidth to customers. Adverse ASA ruling may significantly undermine the company’s marketing strength in future.
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VIRGIN MEDIA (VMED): Free Stock Analysis Report
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