The past couple of years have been miserable ones for AT&T (NYSE:T) shareholders. AT&T stock peaked near $44 in 2016, and by December of last year had reached low of around $27. A long battle to acquire Time Warner against a backdrop of a saturated wireless (and wired) market rightfully concerned investors.
The past few months have been notably different though. The AT&T stock price has rallied with the rest of the market from that December low near $27 to its current price around $32, snapping a long-standing downtrend. Investors, it seems, finally see a glimmer of hope on the horizon.
Whether or not AT&T ever actually reaches that horizon will largely depend on what takes shape over the course of the next few quarters. If it doesn’t get there now, it may not get there at all or at least not in the way it might want.
A Look at AT&T Stock
Change is constant, even for businesses. Indeed, business is about adapting to change. Organizations that can adapt move ahead, and those that can’t, die.
It’s true even in the telecom world. The lines that had previously separated media and medium have been breaking down, with AT&T itself blurring them. While it’s been in the television business for years, last year’s acquisition of Time Warner is the first time the company has been in the production business. Others players, like Comcast (NASDAQ:CMCSA), have also crossed once lines.
That’s only one of three major developments underway right now, however, that are reshaping the telco landscape. A fourth development is unique to AT&T. All of them, however, will ultimately determine how well AT&T stock performs beginning in 2020.
If AT&T doesn’t have a firm grip on all four by the end of next year, it may never be able to get one.
1.On-Demand and AT&T Stock
Netflix (NASDAQ:NFLX) is the undisputed leader of the on-demand video market, and that’s not going to change. Hulu now is mostly owned by Walt Disney (NYSE:DIS) and a distant second. While that’s subject to change, it’s unlikely another player will catch up anytime soon.
Disney’s planned standalone streaming service is already creating a buzz. Meanwhile, CBS (NYSE:CBS) streaming platform CBS All Access recently tallied an impressive total of 8 million subscribers after launching in 2014. Others have also entered the fray.
That leaves AT&T’s Time Warner on-demand video service slated for launch later this year or early next year. But, the company may find that while most consumers are willing to pay for multiple subscriptions, they may not be willing to add a fifth or sixth service to their mix.
AT&T’s Time Warner will have to come up with something fantastic on the streaming front, but its DirecTV streaming product has already been a letdown.
2. AT&T Stock and 5G
The promise of 5G connectivity is incredible, as it will usher in the era of the internet of things. It also makes unwired at-home broadband a possibility. Best of all, this is the year 5G is going to start become commercially available in a big way.
AT&T is a contender in that race and arguably leading it, launching 12 5G networks late last year and adding another nine markets to its 5G plans for this year. That lead is still up for grabs though, and if T-Mobile US (NASDAQ:TMUS) and Sprint (NYSE:S) are allowed to team-up, T-Mobile’s plans to build the nation’s largest 5G network could mesh nicely with Sprint’s enviable spectrum.
3. Competition and AT&T Stock
To that end, the knee-jerk assumption has been that a merger of Sprint and T-Mobile would actually lead to greater, not less, pricing power from the major wireless names.
The rationale makes sense, on the surface. With one less competitor in the arena, there’s one less lowball player to keep AT&T in check.
It’s a presumptuous theory though. There’s no assurance either of AT&T’s remaining rivals wouldn’t continue to make value-minded appeals to consumers, just as it’s not clear AT&T was kept a close eye on Sprint’s or T-Mobile’s pricing plans to begin with. In the end, supply and demand always find an equilibrium.
4. AT&T Has Mounds of Debt
Finally, as of the most recent look, AT&T was indebted to the tune of $171 billion.
A big chunk of that stems from the $85 billion purchase price for Time Warner, and with $40 billion in the bank, liquidity isn’t a pressing problem. CFO John Stephens has also made clear he’s prioritizing paying down that debt. The company’s making progress on that front too, earmarking $12 billion worth of this year’s projected cash flow to retire outstanding bonds.
It’s going to need to make much more progress though, and that’s ultimately going to depend on whether or not the Time Warner deal pays for itself and whether or not its investments in 5G pay for themselves. Both remain big question marks.
Bottom Line for AT&T Stock
The key here to all four factors is that they’re coming, and soon. There is no postponing that can be done. 5G will arrive this year, in earnest. The on-demand market will saturate later this year, and gel next year. T-Mobile and Sprint will either merge this year or next, or if not, they’ll finally abandon the idea for good.
AT&T will have to respond to either outcome. Not even AT&T’s debt plans are set in stone, subject to lots of variables this year that may determine the debt path it takes going forward.
Traders have been betting that the company will navigate its way to the promised land through what promises to be a transitional year, bidding up T stock to the tune of 20% since late-December.
If the rally is going to persist as the year wears on though, the telecom giant is going to have to prove solid progress on the four for aforementioned fronts.
It’s not clear that’s in the cards.
As of this writing, James Brumley held a long position in AT&T. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
