AI And Digital Health Expansion Will Shape A Stable Long Term Outlook

Catalysts

About TELUS

TELUS is a Canadian-based communications and technology company providing wireless, fiber connectivity and digital solutions across consumer, business, health and AI-enabled services.

What are the underlying business or industry changes driving this perspective?

• While TELUS is scaling AI-enabled solutions toward a projected external revenue base of approximately $2 billion by 2028, heavy upfront investment in sovereign AI factories and GPU capacity could compress returns if enterprise adoption lags expectations. This could limit upside to EBITDA growth and free cash flow.
• Although TELUS Health is benefiting from global demand for digital health, mental well-being and data-driven payer and provider platforms, integrating new acquisitions and maintaining margin expansion in a regulated, cost-sensitive healthcare environment may restrain net margin and earnings upside.
• While data consumption and IoT connectivity continue to rise across Canada, persistent mobile ARPU pressure and intensifying device promotions during peak seasons risk offsetting subscriber growth. This could keep service revenue and earnings growth modest rather than accelerating.
• Although the Terrion tower partnership and fiber partner-build models lower success-based capital and support 10% capital intensity targets, sharing infrastructure economics and relying on wholesale-style arrangements could cap long-term return on invested capital and temper free cash flow growth.
• While TELUS is broadening its diversified B2B portfolio in cybersecurity, private wireless and global CX and AI solutions, competitive intensity and ongoing margin pressure in TELUS Digital suggest that revenue gains may not fully translate into sustained EBITDA and EPS expansion.

Assumptions

This narrative explores a more pessimistic perspective on TELUS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming TELUS's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.8% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach CA$1.5 billion (and earnings per share of CA$0.96) by about December 2028, up from CA$1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$2.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.9x on those 2028 earnings, down from 24.0x today. This future PE is greater than the current PE for the CA Telecom industry at 8.7x.
• The bearish analysts expect the number of shares outstanding to grow by 2.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid scaling of AI enabled capabilities from approximately $800 million of external revenue in 2025 toward a targeted $2 billion by 2028, supported by sovereign AI factories, the NVIDIA partnership and 4,000 AI professionals, could drive structurally higher growth and margin expansion than expected. This may lift earnings and free cash flow above a flat share price outlook.
• Long term global demand for digital health, employer well being, mental health and data driven payer and provider platforms, combined with TELUS Health’s 18% revenue growth, 24% EBITDA growth, expanding margins and outsized LifeWorks synergies, may sustain high growth and profitability. This could support a rerating of earnings and valuation multiples.
• The resilient secular trend toward higher data consumption, 5G, IoT and private wireless, together with TELUS’ industry leading customer additions, low churn below 1% and consistent Internet net adds, could underpin durable revenue and EBITDA growth that pushes the share price higher over time.
• Capital light partner build fiber models, the Terrion tower partnership and modular AI data center expansion may structurally reduce capital intensity toward 10%, improve return on invested capital and unlock higher free cash flow. Alongside deleveraging toward a 3 times leverage target, this could support dividend growth and potential valuation upside.
• The integration and privatization of TELUS Digital, including expected annualized cash synergies of $150 million to $200 million and improving use of AI to lower unit cost to serve, may drive sustained margin expansion in TTech and B2B operations. This could increase net margins and earnings beyond a scenario where the share price merely stays flat.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for TELUS is CA$17.0, which represents up to two standard deviations below the consensus price target of CA$22.5. This valuation is based on what can be assumed as the expectations of TELUS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$30.0, and the most bearish reporting a price target of just CA$17.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CA$22.0 billion, earnings will come to CA$1.5 billion, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$18.3, the analyst price target of CA$17.0 is 7.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.