Why GigaPower Is Important for the Future of AT&T Stock

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AT&T’s (T) GigaPower rollout is proving to be one of the company’s most important projects moving forward. GigaPower has been an ongoing project for well over a year now, with AT&T having the Internet service in nine metro areas at the end of its third quarter. Since then, AT&T has announced major expansions to GigaPower, something T stock owners should recognize as a catalyst going forward.

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AT&T Accelerates the Rollout of GigaPower

In just two months, AT&T has expanded GigaPower from nine metro markets to 18 markets, and most recently to a whopping 56 markets! Notably, these are individual metro markets that each have surrounding areas where AT&T will rollout GigaPower.

The idea is that AT&T wants to get ahead of a trend in Internet broadband where download speeds are moving from an average of 25 megabits per second to peak at 1 gigabit per second. 

GigaPower is one of the few services being built nationwide that tout these high speeds, and with very similar cost structures to inferior service plans, there’s a good chance that services such as GigaPower, Fiber, and Gigabit Pro will dominate the Internet broadband market over the next decade, an Internet broadband market that could top 120 million homes by 2018.

Why AT&T Is Acting so Aggressively With GigaPower

Prior to the acquisition of DirecTV, and AT&T’s new operating structure changes, U-Verse accounted for approximately 10%-12% of its total revenue and was the company’s fastest-growing segment with 20% plus annual growth. Nowadays, U-Verse is combined with AT&T’s acquired DirecTV business in the Entertainment & Internet Services segment.

During AT&T’s last quarter, its first with DirecTV, revenue in its Entertainment & Internet Services segment nearly doubled to put it on pace for $50 billion in annual revenue moving forward. Further, AT&T saw an 830-basis-point increase in its EBITDA margin to 22.2% for the businesses that make up Entertainment & Internet Services.

That said, the combination of these assets, and AT&T’s attempt to transition U-Verse video users to DirecTV overshadowed the 172,000 new U-Verse internet subscribers it added in the quarter, giving it 12.2 million total. Nonetheless, 12.2 million subscribers is large, but it equates to market share of about 10% in the U.S. broadband Internet space. Hence, there is still room for AT&T to significantly up its market share in this large industry, which is one reason that AT&T is prioritizing GigaPower buildouts.

At the end of the day, there are three services like GigaPower that are all expanding throughout the country in an attempt to grab as much of this new market as possible. So far, AT&T is winning the race with 56 markets, including the likes of Los Angeles, San Francisco, Indianapolis, and Nashville, among others.

The basic premise behind Internet services that offer speeds of 1 gigabit per second is that, eventually, they will replace inferior services. Therefore, a transition is taking place, where subscribers of slower services will upgrade to the faster speeds while paying about the same price. This gives AT&T an incentive to rollout GigaPower as quickly as possible, in hopes of capturing a leading share of the broadband market, which could be great for T stock.

Implications for T stock

As already noted, AT&T manged to create revenue of more than $4 billion quarterly with a 10% share of the broadband market from U-Verse. Given how quickly AT&T is rolling out GigaPower, there’s a good chance the company could capture 15%, maybe even 20%, of the broadband market long-term. If so, that would add $10 billion-$15 billion in annual revenue. Clearly, that would be good for AT&T stock price.

Furthermore, because most of the expenses associated with broadband are accrued prior to service, during the construction phase, this would be high-margin revenue long term, which is also good for T stock. Therefore, it is easy to see why AT&T is investing so much time and energy into GigaPower, and is doing so very quickly. This is an under-the-radar project that could very well fuel long-term growth for AT&T, and also gains for T stock.

Brian Nichols owns shares of AT&T stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/gigapower-important-future-att-t-stock/.

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