How Will An Expanding Postpaid Phone Business Drive AT&T Stock’s Q1 Results?

AT&T stock (NYSE:T) is poised to report its Q1 2024 earnings on April 24. We expect the company to report earnings of about $0.55 per share, slightly ahead of the consensus estimates although this would mark a decline of about 10% compared to last year. Revenues are poised to come in at $30.6 billion, roughly in line with consensus and about 1% ahead of the last year. So what are some of the trends that are likely to drive AT&T’s results for the quarter?

We will be closely watching AT&T’s performance on the postpaid phone front. The carrier added a total of 526,000 postpaid phone subscribers in Q4 2023 , compared to 41,000 in the year-ago quarter. The net adds were higher than Verizon which added just about 449,000, although they were below T-Mobile which added 934,000 postpaid phone customers. The momentum could likely hold up. AT&T has been investing in improving its network and deploying more mid-band spectrum, which offers high speeds and wide coverage. The company spent $23.6 billion on its 5G and fiber broadband infrastructure over 2023, while noting that it would spend about $14 billion over the next five years to shift the bulk of its network traffic onto open and interoperable platforms. We will also be watching the performance of the company’s fiber broadband business. AT&T had quarterly net adds of 200,000 customers for the business over the last 16 consecutive quarters. AT&T expects its broadband business revenues to grow by at least 7% in 2024. AT&T has also been cutting costs, via headcount reductions and giving up office space. However, earnings are expected to trend lower, in part due to higher depreciation expenses, including accelerated depreciation of networking equipment from Nokia as the carrier transitions to an open network buildout provided by Ericsson.

Looking at a slightly longer period, 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 35% 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 -9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 is slightly undervalued. AT&T trades at just about 7.5x consensus 2024 earnings, well below historical levels. The company’s dividend yield also stands at a solid 7%.  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. 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 $18 price estimate, which is 10% 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] Returns as of 4/16/2024
[2] Cumulative total returns since the end of 2016

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