AI Initiatives Like AIX And AIDC Will Strengthen Future Business Prospects

Key Takeaways

• Strategic focus on AI and expansion into AI services is expected to drive substantial growth in revenue and market presence.
  
• Operational improvements and cost-efficiency measures are set to enhance profit margins and fund further investment in digital growth areas.
  
• Focus on AI restructuring presents execution risk and may affect future earnings amid competitive pressures, limited growth, and constrained cash flows impacting dividends.

Catalysts

Provides wireless telecommunication services in South Korea.

• SK Telecom's ongoing operational improvements, including cost-efficiency measures and phasing out low-profit businesses, are expected to enhance operational income and net income margins by focusing resources on higher-profit sectors.
  
• The company's strategic investments and partnerships in AI, particularly in the B2B segment with services like AIX and AIDC, are projected to drive significant growth in AI-related revenues, which increased by 19% year-over-year in 2024 and are expected to continue growing.
  
• SK Telecom's AI infrastructure expansion, such as the introduction of GPU-as-a-Service and building AI data centers, aims to capitalize on the increasing demand for AI computing power. This initiative could enhance revenue streams from the AI sector.
  
• The introduction of a subscription-based model for the A. personal AI agent service, and global expansion initiatives like Aster, aim to bolster consumer engagement and generate recurring revenue streams, thereby supporting overall revenue growth.
  
• SK Telecom's commitment to utilizing AI for operational improvements is anticipated to continue driving efficiency and cost savings, which can improve operating margins and free up resources for further investment in growth areas like AI and digital services.

SK Telecom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SK Telecom's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ₩1528.9 billion (and earnings per share of ₩7068.77) by about April 2028, up from ₩1230.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₩1362.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 14.8x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

SK Telecom Future Earnings Per Share Growth

Risks

• The company's revenue target for 2025 is only a modest 1% growth year-over-year, suggesting limited growth expectations which could affect overall revenue potential and investor confidence in long-term growth prospects.
  
• Despite making operational improvements, the financial guidance indicates robust economic, industrial, and political uncertainties that could hinder consistent revenue streams and impact net margins.
  
• The restructuring of business units to focus on AI, while promising, involves significant execution risk, as recent AI ventures like AIX and AIDC comprise a small portion of total revenue, posing a risk to future earnings if these segments do not scale as anticipated.
  
• The decision to maintain a stable dividend payout, with no increase anticipated, reflects constrained cash flows and the need for resource allocation to compete in AI, potentially impacting net income and shareholder satisfaction.
  
• Intense competitive pressures in both the telecom and AI sectors could limit market share and growth in AI-related businesses, affecting both operating income from telecom operations and AI earnings growth, given reliance on partnerships and integration capabilities.

Valuation

• The analysts have a consensus price target of ₩68860.0 for SK Telecom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩86000.0, and the most bearish reporting a price target of just ₩56000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩18955.8 billion, earnings will come to ₩1528.9 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of ₩57800.0, the analyst price target of ₩68860.0 is 16.1% 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.