5G And Fiber Will Drive Cautious Improvements Amid Cost Challenges

Key Takeaways

• Heavy investment in 5G and fiber, alongside tax incentives reliance, risks revenue growth stagnation due to market saturation.
  
• Cost-saving initiatives through AI and legacy exits face upfront costs, risking margin pressures if gains are delayed.
  
• Consistent 5G and fiber subscriber growth, margin expansion, and strategic share repurchases drive AT&T's revenue growth and operational efficiency gains.

Catalysts

Provides telecommunications and technology services worldwide.

• AT&T's continued heavy investment in 5G and fiber infrastructure, amounting to $22 billion, coupled with reliance on potential tax incentives for expanded investment, may not yield sufficient returns as competition and market saturation in these areas increase, risking revenue growth stagnation.
  
• The initiative to achieve $3 billion in cost savings by 2027 through AI integration and exiting legacy copper operations involves significant upfront costs and risks operational disruptions, which could pressure net margins if efficiency gains are slower to realize than anticipated.
  
• Declines in Business Wireline revenue reflect ongoing technological obsolescence and further pressure from secular declines, potentially eroding Business Wireline earnings as legacy services are phased out, before new, high-margin services can compensate.
  
• Potential regulatory and execution delays in decommissioning copper network infrastructure might result in prolonged operational costs and hinder the financial benefits AT&T anticipates, affecting their projected improvement in free cash flow margins.
  
• Share repurchase plans hinge on maintaining a debt ratio of net debt to adjusted EBITDA around 2.5 times, and any failure to meet internal cash generation targets due to market headwinds could disrupt these plans, potentially weakening earnings per share expectations.

AT&T Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AT&T compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AT&T's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.8% today to 13.0% in 3 years time.
• The bearish analysts expect earnings to reach $16.3 billion (and earnings per share of $2.32) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 17.7x today. This future PE is lower than the current PE for the US Telecom industry at 13.7x.
• 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

• AT&T has achieved consistent growth in 5G and fiber subscribers, with service revenue growth in Mobility at 3.5%, which can drive revenue and profit growth as it leverages its network expansion efforts.
  
• The company has demonstrated margin expansion and free cash flow growth in 2024, showing operational efficiency that could counteract potential downturns in net margins.
  
• AT&T plans to execute a shareholder return plan involving $40 billion over three years, including significant share repurchases which could bolster earnings per share by reducing the number of shares outstanding.
  
• AT&T achieved its highest-ever net adds in AT&T Fiber during the fourth quarter of 2024 and is experiencing strong fiber revenue growth, which positively impacts its revenue growth.
  
• The commitment to a deliberate transition to a modern communications infrastructure, along with strategic cost savings, could improve operational efficiency and sustain earnings growth.

Valuation

• The assumed bearish price target for AT&T is $24.24, which represents one standard deviation below the consensus price target of $27.77. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $125.0 billion, earnings will come to $16.3 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $26.47, the bearish analyst price target of $24.24 is 9.2% lower. The relatively low difference between the current share price and the analyst bearish 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.