After the past few weeks, investors would be forgiven for ignoring the latest acquisition by AT&T Inc. (NYSE:T). The long-running drama of the company’s acquisition of Time Warner finally has come to an end. Yet AT&T stock tanked on the news, and below $32 the stock is threatening to touch a six-year low.
In that context, the acquisition of ad-tech firm AppNexus, announced Monday, might not seem like big news. The reported purchase price is barely 1% of the current market capitalization of AT&T stock.
It’s less than one-fortieth the price paid, in stock and in cash, for Time Warner (already rebranded as WarnerMedia). Investors shrugged off the news, with T stock rising 0.06%, albeit on a red day in the markets.
To be sure, AppNexus isn’t a revolutionary deal for AT&T. But it is a sign of the company’s strategy going forward. The success of that strategy will determine whether T stock can finally end its years of sideways trading.
The AppNexus Deal
AppNexus is a privately held ad-tech firm, which claims to operate the “world’s largest independent marketplace for digital advertising.”
Algorithms developed by AppNexus target readers (or viewers) based on demographics, historical patterns, and myriad other data points.
Reports suggest that AT&T paid $1.6 billion for AppNexus, which implies it was willing to pay up in the deal.
Even Criteo SA (ADR) (NASDAQ:CRTO), not that long ago considered an ad-tech darling, has an enterprise value below $2 billion.
But AppNexus is a firm with a strong reputation and a compelling backstory. CEO and co-founder Brian O’Kelley was one of the founders of Right Media, which essentially invented programmatic advertising back in 2006.
Right Media was later sold to Yahoo!, now part of AT&T rival Verizon Communications Inc. (NYSE:VZ).
In the release announcing the deal, AT&T advertising and analytics head Brian Lesser said his company “went out and found the strongest player in the space.”
It’s not guaranteed that is (or will be) the case, but clearly AT&T more interested in finding the best-in-breed provider than focused on the valuation paid.
That alone highlights that the deal is more important to AT&T than the size might suggest.
The Strategy for AT&T Stock
In a sense, it’s AppNexus – not Time Warner or DIRECTV – that marks the true end of AT&T’s acquisition spree. And that’s not just in a chronological sense.
DIRECTV added video distribution to AT&T’s wireless-heavy offering. Time Warner added content to the distribution infrastructure.
But it’s AppNexus that could, in theory, help the sum of AT&T’s businesses become greater than the parts. As the company pointed out in its release, it has 170 million “direct to consumer relationships” worldwide.
It gains a massive amount of data from those relationships, from viewing patterns by DIRECTV NOW subscribers, from cell phone usage, and from viewer demographics.
It’s AppNexus that can give AT&T the ability to truly monetize that data. As The Verge put it (emphasis mine): “AT&T wants to appeal to advertisers with hyper specific targeted ads by levering the huge amount of data it already has on customers…”
It’s a strategy that mimics the data-centric offerings of Google and Facebook – without the attendant risk.
More broadly, it’s a strategy that rests on what the ‘new’ AT&T could be: a company with deep, deep relationships with its customers.
With AppNexus, AT&T’s combined distribution and content businesses don’t just benefit from ‘bundled’ pricing and cost synergies.
They rest on 170 million discrete customers who can be targeted by AT&T (and WarnerMedia) advertisers in a way not available anywhere else.
Is AT&T Stock a Buy?
The question is whether this new strategy makes T stock a buy. On that front, I’ve long been bearish. I argued earlier this month that Time Warner alone didn’t make AT&T stock a buy.
And I continue to be flummoxed by the insistence among retail investors, in particular, that T is some sort of high-yielding gem.
Six years of middling growth in terms of both the dividend and earnings provide strong evidence to the contrary.
With T stock at multi-year lows, I’ll admit to seeing some potential value here. But I’m still skeptical.
DIRECTV was a poor purchase. Cord-cutting is hitting that business hard, and the performance of rival DISH Network Corp (NASDAQ:DISH) shows that AT&T overpaid.
I still think the U.S. wireless business is a “circular firing squad.” And I question whether Time Warner’s content is that valuable given struggles at most other media stocks.
From here, AT&T simply looks like the combination of several businesses which aren’t particularly attractive on their own. But right now, that’s the point.
If the AppNexus technology can create value from that combination itself, AT&T stock almost certainly is too cheap. Indeed, neither a forward EPS multiple barely above 9x nor a dividend yield of 6.3% prices in any growth.
AppNexus on its own isn’t going to drive that growth. But as a part of AT&T’s overall strategy, it could help its new owner to once again become a heavyweight in the advertising space.
And if that comes to pass, the patience shown by so many AT&T shareholders should finally pay off.
As of this writing, Vince Martin has no positions in any securities mentioned.