Investment In 5G And AI Will Reduce Future Costs And Strengthen Operations

Key Takeaways

• Investments in 5G and fiber are set to drive growth and enhance margins by attracting more customers and improving operational efficiencies.
  
• Transitioning from legacy operations and integrating AI are expected to reduce costs and expand margins over time.
  
• Execution risks in cost-saving strategies, industry competition, and capital-intensive investments in 5G and fiber could pressure AT&T’s revenue growth and net margins.

Catalysts

Provides telecommunications and technology services worldwide.

• AT&T's investment in 5G and fiber is expected to drive sustained growth and enhance margins, as they focus on building a superior and cost-effective broadband network. This is likely to impact revenue positively as more customers are attracted to their services and can also improve net margins through operational efficiencies.
  
• The ongoing transition away from legacy copper operations and the integration of AI throughout operations are expected to yield significant cost savings, leading to margin expansion and improved earnings over time.
  
• The company's shareholder return plan, including $10 billion in share repurchases beginning in the second half of 2025, is anticipated to contribute to enhancing earnings per share (EPS) through a reduced share count.
  
• The AT&T Guarantee is poised to strengthen customer loyalty and satisfaction, potentially reducing churn and increasing revenue retention and growth across wireless and fiber services.
  
• Increased capital flexibility, including a potential $10 billion allocation for strategic opportunities or to improve the balance sheet, offers the potential to explore growth avenues that could positively impact revenue and earnings.

AT&T Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AT&T's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $16.9 billion (and earnings per share of $2.48) by about January 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 analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, down from 16.3x today. This future PE is lower than the current PE for the US Telecom industry at 16.3x.
• Analysts expect the number of shares outstanding to decline by 1.74% 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

• The decline in Business Wireline revenues, attributed to industry-wide secular declines in legacy services, could harm overall revenue growth unless offset by growth in other segments.
  
• AT&T's planned $3 billion-plus cost savings strategy relies heavily on evolving technology and exiting legacy network operations, which carries execution risk and may impact net margins if not managed efficiently.
  
• The capital-intensive nature of investments in 5G and fiber, alongside potential increases in cash taxes, could constrain free cash flow in the absence of successful concurrent cost management and revenue growth.
  
• Intensifying competition in the broadband sector, especially with cable operators becoming more aggressive, could pressure AT&T to lower prices or increase marketing spend, affecting net margins and revenue.
  
• Regulatory and operational challenges associated with the transition from copper infrastructure may delay cost savings objectives and potentially affect net earnings if not carefully navigated.

Valuation

• The analysts have a consensus price target of $26.52 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 $30.0, and the most bearish reporting a price target of just $15.49.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $127.7 billion, earnings will come to $16.9 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $24.4, the analyst's price target of $26.52 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus 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.