5G And AI Integration Will Strengthen US Communications Infrastructure

Key Takeaways

• Focus on expanding 5G and fiber networks aims to drive growth and enhance earnings, with cost savings improving margins and profitability.
  
• Share repurchases and potential tax reforms could strengthen infrastructure investments, boosting financial strength and EPS.
  
• Reliance on legacy wireline services and competitive broadband pressures jeopardize revenue growth and margins, with tax reform uncertainty further complicating capital investment sustainability.

Catalysts

Provides telecommunications and technology services worldwide.

• AT&T's strategic focus on expanding its 5G and fiber networks is expected to drive subscriber growth and service revenue, thereby enhancing overall earnings.
  
• Plans to integrate AI into operations to achieve $3 billion-plus in cost savings by 2027 are projected to improve net margins.
  
• With FCC approval to transition from legacy copper networks, AT&T anticipates further cost efficiencies, positively impacting free cash flow and long-term profitability.
  
• The potential for tax reform under the new administration could lead to increased capital investment in U.S. communications infrastructure, bolstering revenue and operational strength.
  
• Planned share repurchases beginning in the second half of 2025 are part of a broader shareholder return strategy, which could enhance earnings per share (EPS) over time.

AT&T Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on AT&T compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming AT&T's revenue will grow by 2.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.8% today to 13.5% in 3 years time.
• The bullish analysts expect earnings to reach $17.6 billion (and earnings per share of $2.83) by about April 2028, up from $10.7 billion today. The analysts are largely in agreement about this estimate.
• 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 15.3x on those 2028 earnings, down from 17.9x today. This future PE is greater than the current PE for the US Telecom industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

AT&T Future Earnings Per Share Growth

Risks

• There are potential risks associated with AT&T’s reliance on legacy wireline services, as declines in Business Wireline revenues from these services can negatively impact overall revenue growth and net margins.
  
• The transition away from copper networks and the associated regulatory processes may not result in immediate cost savings, which could delay margin improvements and negatively affect earnings.
  
• Competitive pressures in the broadband market, particularly from cable companies, could hinder AT&T's ability to maintain pricing power, potentially impacting revenue streams and net income from fiber services.
  
• The uncertainty surrounding potential tax reform and its implications on capital investment decisions could affect AT&T’s ability to sustain its capital expenditures and future revenue growth, especially if favorable tax incentives are delayed or not enacted.
  
• The decommissioning of legacy network operations, while necessary, involves operational risks and costs that could impede short-term financial performance, affecting EBITDA and potentially straining net profit margins.

Valuation

• The assumed bullish price target for AT&T is $31.18, which represents one standard deviation above the consensus price target of $27.68. This valuation is based on what can be assumed as the expectations of AT&T'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 $32.0, and the most bearish reporting a price target of just $15.49.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $130.2 billion, earnings will come to $17.6 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $26.83, the bullish analyst price target of $31.18 is 13.9% 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.