Down 50% From 2021, We Think There’s Upside For AT&T Stock

AT&T stock (NYSE:T) stock has had a tough year so far, declining by over 12% year-to-date, faring worse than peers T-Mobile (up 7% this year) and Verizon (down about 7% year-to-date). There are a couple of factors that are impacting the stock. AT&T’s wireless subscriber growth has clearly slowed compared to last year, due to saturation in the wireless market and easing tailwinds from the Covid-19 lockdowns. For example over Q3 2023, the company added a total of 468,000 postpaid phone subscribers, down from 708,000 adds in Q3 2022. Competition is also mounting in the wireless sector. While pay-TV player Dish is building out its own 5G network, Comcast has also been doubling down on the space via the mobile virtual network operator route, adding 294,000 phone lines during Q3, taking its total wireless base to 6.3 million subscribers. This could hurt wireless players, who have invested considerably in building out their 5G networks. The high-interest rate environment is also likely to impact AT&T stock, given that the company had about $138 billion in debt on its books as of the last quarter. Higher rates also tend to impact stocks with a higher dividend yield such as AT&T.

Moreover, T stock has suffered a sharp decline of 50% from levels of $30 in early January 2021 to around $15 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, T stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -14% in 2021, -25% in 2022, and -12% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that T underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could T face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

We think AT&T stock has room for upside. AT&T trades at just about 7x consensus 2023 earnings, well below historical levels. The company’s dividend yield also stands at a solid 7%. While subscriber growth has slowed compared to the pandemic period, things are looking a bit better sequentially. AT&T is also making progress with cutting its cost, with its wireless operating margins rising by 2% to 43% in Q3. Cash flows are also projected at $16.5 billion or more for this year, an increase from its previous guidance of $16 billion.  Moreover, we think that AT&T should be able to drive profits higher in the long term as the expensive build-out of its 5G network winds down, with revenues and margins benefiting from subscribers opting for more premium plans. For instance over Q3, average revenue per subscriber rose driven by the company’s move to subsidize high-end handsets such as the iPhone 15 Pro for customers who upgrade from value plans to more premium unlimited offerings. AT&T’s fiber broadband operations have also been expanding, with the company reporting a total of 8 million subscribers as of Q3, up 16% compared to last year. Although the U.S. economy faces some headwinds, wireless data, and telecom services, have become essential to customers, meaning that AT&T is unlikely to see a major impact on its financials. We remain positive on AT&T stock with a $19 price estimate, which is 17% ahead of the current market price. See our analysis on AT&T Valuation for more details on what’s driving our price estimate for AT&T. For more details on AT&T’s key revenue streams check out our analysis of AT&T Revenues: How Does T Make Money?

[1] Month-to-date and year-to-date as of 11/28/2023
[2] Cumulative total returns since the end of 2016

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