AI Adoption And Capital-Light Shift Will Drive Stronger Long-Term Earnings Power

Catalysts

About TELUS

TELUS is a Canadian-based technology company providing nationwide wireless, PureFibre broadband, digital, health, agriculture and AI-enabled solutions to consumers and businesses globally.

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

• Rapid scaling of AI-enabled offerings, including sovereign AI factories and data-centric services, is set to more than double AI-related external revenue to approximately $2 billion by 2028, supporting faster consolidated revenue growth and structurally higher EBITDA margins.
• Expansion of TELUS Health and its global footprint, supported by successful integrations such as LifeWorks and Workplace Options, is driving double-digit revenue and EBITDA growth that should increasingly diversify earnings and lift consolidated margin profile over time.
• Ongoing shift toward capital-light models such as Terrion tower partnerships and fiber partner builds is expected to reduce success-based CapEx, improve capital intensity toward the 10% target and translate into stronger free cash flow and deleveraging capacity.
• Industry-leading bundled mobile and PureFibre offerings, combined with best-in-class churn below 1%, provide a durable customer base and higher lifetime revenue per user that should sustain steady top line growth and support resilient net income.
• TELUS Digital’s privatization and deep integration of AI across internal operations are enabling double-digit cost reductions and smarter automation, which are poised to lower unit cost to serve and expand both TTech EBITDA margins and long-term earnings power.

Assumptions

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

• The bullish analysts are assuming TELUS's revenue will grow by 3.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.8% today to 8.7% in 3 years time.
• The bullish analysts expect earnings to reach CA$2.0 billion (and earnings per share of CA$1.26) by about December 2028, up from CA$1.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$1.5 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, up from 23.0x today. This future PE is greater than the current PE for the CA Telecom industry at 8.6x.
• The bullish 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 7.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent mobile ARPU pressure in a highly competitive Canadian wireless market, particularly around major promotional periods such as Black Friday and Christmas, could mean subscriber growth does not translate into proportional top line expansion, constraining long term revenue growth and limiting the expected lift in net margins and earnings.
• The sovereign AI factory and broader AI enabled portfolio require sustained capital deployment into GPU capacity and data center infrastructure. If industry wide overbuild, weaker than expected utilization or slower enterprise and government adoption emerge, the anticipated high margin AI revenue could fall short and weigh on consolidated EBITDA margins and earnings.
• Strategic partner models such as Terrion for towers and third party fiber builds shift economics toward wholesale like arrangements with lower product intensity per customer. If lease costs, partner returns or acquisition activity outpace monetization, TELUS could see margin compression and weaker free cash flow available for deleveraging and dividend growth.
• Health and digital verticals are being scaled through large acquisitions and complex integrations such as LifeWorks, Workplace Options and TELUS Digital. If synergy realization slows, integration costs rise or customer churn increases in these global businesses, the expected double digit growth and margin expansion could stall, pressuring consolidated net income and the strength of the diversified earnings base.
• Despite progress, leverage remains elevated at 3.5 times and the plan to reach approximately 3 times by 2027 depends on EBITDA growth, moderated capital intensity and ongoing asset monetization. Any combination of weaker revenue growth, slimmer margins or delayed partnership proceeds could limit deleveraging capacity and constrain earnings growth after interest expense.

Valuation

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

• The assumed bullish price target for TELUS is CA$28.36, which represents up to two standard deviations above the consensus price target of CA$22.18. 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be CA$22.9 billion, earnings will come to CA$2.0 billion, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$17.5, the analyst price target of CA$28.36 is 38.3% higher.
  
• 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.