The telecommunications giant AT&T Inc. (NYSE:T) has perhaps surprisingly eclipsed expectations over the past year or so. Last year, the company’s share price had a banner year, posting a gain of more than 30% but a dip over the past month has some investors on edge, wondering why the telecoms giant is pulling back?
Management has decided to focus on the firm’s core competency now and is shedding former aspirations of becoming an entertainment giant. The divestiture of that unit might also cough up some cash to support the heavily indebted balance sheet in the process. So, should investors consider the stock as being on the verge of leaning up its financials and on the cusp of a new bullish wave?
Finally, Going Out of the Entertainment Business
AT&T is exiting the entertainment business following management’s announcement that it would be selling its remaining stake in DIRECTV to TPG. The company had owned 70% of DIRECTV but decided to offload the entire stake and fully exit the vertical.
At the time of the transaction, AT&T reported that at the time of the closing of the transaction, cash distributions of $19 billion and an additional $7.6 billion of cash payments were expected.
The sale is a real U-turn following DIRECTV’s purchase in 2015, though admittedly it had sold a 30% stake to TPG in 2021. This was seen as a much-needed exit from this business that had shown dwindling distributions. The divestiture is expected to allow AT&T to focus on its core wireless and fiber connectivity operations.
What’s Next for AT&T?
5G has been absolutely instrumental in AT&T’s success. Last year alone, global 5G connections surpassed two billion, which was a 48% leap from the prior year. Over 170 million new 5G connections were added globally during Q3 of 2024.
Even if we ignore the contributions of high-speed internet, mobile network traffic is growing more than ever, and the need to use the internet is felt every day.
5G is actually enabling a lot due to its low latency and other characteristics. So much market opportunity obviously translates into a bright outlook for the market. According to one estimate, the global 5G services industry is expected to grow at a compound annual growth rate of 34% to reach $427.7 billion by 2028.
As a result of this, AT&T has turned its attention towards growing its industry-leading wireless connectivity and fiber portfolio. Late last year, management launched a single-box solution to seamlessly integrate fiber and 5G networks and ensure continuous growth in Gigapower’s fiber footprint. It also signed four new agreements with commercial open-access providers.
The company has also made it quite obvious that this is going to be its way forward and the way it makes money as opposed to its previous efforts to diversify into entertainment. AT&T planned to raise prices on fiber internet by $5 per month, which makes it a little bit higher than some of the cheapest fiber providers. But it does not seem to be a dealbreaker, as we shall see in a moment.
ARPU On The Rise, But Why?
Management last reported its third quarterly results for fiscal 2024. In that, it reported 403,000 postpaid phone net adds, with an industry-leading, and expected, churn of 0.78%.
Severe weather was blamed for impacting operations alongside an outage in the Southeast. Nevertheless, these headwinds did not hinder the company from posting its 19th straight quarter of adding more than 200,000 new AT&T Fiber customers (adding 226,000 customers). In Q3, it also reached 28.3 million consumer and business locations passed with fiber.
Of course, the company’s financials have reap the benefits from these additions, though there are some headwinds that have stalled process. Revenue for the quarter declined marginally compared to the prior year’s quarter to $30.2 billion. The number is not that bad in itself and buoyed by service revenue growth due to ARPU expansion, but lower equipment revenues more than offset it.
As is seen from the company’s efforts to make itself leaner, it is trying to shore up cash and redirect it to its core business areas. In Q3, its cash from operations came in at $10.2 billion, down 1% from its year-ago value.
The company lost some cash due to a $480 million payment of network modernization termination fees and continued reduction of direct supplier financing obligations. By contrast, EBITDA rose 3% to hit $11.6 billion thanks to gains in the mobility segment as well as fiber growth.
AT&T really does seem cheap when compared to some of its arch-rivals, now trading at 10.22x its forward non-GAAP earnings, a figure well below the industry average. With that said, it’s largely to be expected from a company facing sluggish growth. While the company continues to grow, this might turn around, especially since it is opting to be leaner. So, keeping this telecom giant in sight might not hurt for now.
Why Is AT&T Stock Dropping?
AT&T stock has been dropping over the past month in line with a pullback but price hikes and a leaner balance sheet should support the share price over the medium to long term.
Perhaps ranking among the most attractive qualities of the firm is the 5% dividend yield now and the 18x earnings multiple that will attract value investors.
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