Investments In 5G And Fiber Will Lead Industry In Converged Connectivity

Key Takeaways

• AT&T's investment in 5G and fiber networks is expected to drive revenue growth and improve customer retention through converged connectivity services.
  
• Strategic partnerships, cost transformation, and debt reduction efforts aim to enhance net margins, financial flexibility, and future earnings.
  
• Declines in business services and high expenditure on network modernization could hinder AT&T's revenue growth and financial flexibility amid strategic industry shifts.

Catalysts

Provides telecommunications and technology services worldwide.

• AT&T's investment in 5G and fiber networks aims to lead the industry in converged connectivity, which is expected to drive future revenue growth by attracting more high-value wireless and broadband subscribers.
  
• Their strategic expansion of the AT&T Fiber network through partnerships and joint ventures, like GigaPower with BlackRock, is designed to increase reach and penetration in new markets, potentially boosting long-term revenue and improving net margins.
  
• The focus on combining wireless and broadband into a converged service at scale is expected to enhance customer retention and increase ARPU (Average Revenue Per User), ultimately supporting earnings growth.
  
• Ongoing cost transformation, including higher operating leverage from fiber investments and rationalizing real estate footprint, is anticipated to improve net margins and contribute positively to future earnings.
  
• Continued deleveraging efforts and reduction of net debt could enhance financial flexibility, improve credit ratings, and lower interest expenses, thus positively impacting net margins and future earnings.

AT&T Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AT&T's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $16.2 billion (and earnings per share of $2.36) by about January 2028, up from $8.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $12.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 18.0x today. This future PE is lower than the current PE for the US Telecom industry at 18.5x.
• Analysts expect the number of shares outstanding to decline by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

AT&T Future Earnings Per Share Growth

Risks

• Declines in Business Wireline service revenues and low-margin Mobility equipment revenues could pressure overall revenue growth, impacting AT&T's ability to sustain expected earnings growth.
  
• Ongoing secular declines in legacy voice services and implications from industry shifts suggest continued downward pressure on Business Wireline EBITDA, potentially hindering overall profitability.
  
• The impact of large-scale investments, vendor financing payments, and cash flow allocation to modernize networks might limit short-term financial flexibility, affecting net margins.
  
• The transition to fiber and 5G is capital intensive, with potential increased capital expenditure requirements that could exert pressure on free cash flow and slow net debt reduction.
  
• The sale of the remaining DIRECTV stake could affect reported earnings, and uncertainties in regulation and market conditions might delay expected financial benefits from this transaction.

Valuation

• The analysts have a consensus price target of $25.92 for AT&T 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 $32.5, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $126.6 billion, earnings will come to $16.2 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $22.2, the analyst's price target of $25.92 is 14.3% 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.