No one will confuse AT&T (NYSE:T) for a particularly sexy investment. Nevertheless, T stock has generated considerable attention recently. For starters, shares have been all over the map. Although the telecom giant is up 10% year-to-date, it doesn’t really seem like it, causing income-seeking investors to wonder if AT&T’s currently generous dividends are sustainable.
That line of inquiry has become more pronounced following the company’s first quarter of 2019 earnings report on April 24. Although the posted earnings per share of 86 cents exceeded met analyst expectations and topped the year-ago quarter’s tally by a penny, the overall performance was rather disappointing.
The markets punished the AT&T stock price, driving it down more than 4%, compared to a flat S&P 500 index in the days since the report.
Understanding the emotional component behind market valuations, I can see why. Conspicuously, net income of $4.35 billion slipped badly from Q1 2018’s haul of $4.76 billion. Also, top-line sales of $44.83 billion missed analysts’ expectations of $45.11 billion. Obviously, these front-facing metrics hurt optics for T stock.
But some of the details also raised eyebrows. For instance, management declared that revenue from its Entertainment Group took a nearly 1% hit year-over-year. Also, sales from Business Wireline dropped 3.7% during the quarter. Because the telecom firm invested so aggressively in these businesses, investors soured on the then-elevated AT&T stock price.
It’s fair to point out, though, that rival Verizon (NYSE:VZ) also suffered a similar miss with its Q4 2018 earnings report. In late January, VZ shares slipped after posting bad misses on net and operating income. Yet Verizon eventually recovered, and the same can happen to T stock.
Putting T Stock in the Right Context
If you look at cautious or bearish articles written about AT&T stock, you’ll find several common themes. The massive debt load is one of them, as is the fact that telecom is a slow-growth sector. For a more detailed look at the bear case, I highly recommend you read InvestorPlace contributor Vince Martin’s take.
Indeed, anytime you want to invest in any company, you should always read why others don’t like it. Rather than get emotional, cyber-stalk them, or send them nasty emails, learn from them. If, after reading their opinion, you still feel confident about your thesis, you’ll improve your odds of profitability.
I did read Martin’s analysis carefully, and he’s right: unprecedented debt levels weigh on the AT&T stock price. So, too, do expensive business decisions that aren’t panning out, like the 2015 DirecTV acquisition. Also, AT&T’s attempt to assert itself in the entertainment-content game may cannibalize individual components of its vast empire.
At the same time, you’re better served putting T stock in the right context: it’s simply not like any other “normal” investment.
For one thing, I’m not as worried about the debt level as other analysts. Why? Because we’re talking about titans plying their trade in the 5G network, the backbone of tomorrow’s digitalization economy. This debt isn’t like a student-loan debt for an art-history degree, so don’t treat it like one.
As far as limited growth opportunities and hiccups in content, I’m concerned but not anxious. Again, we must appreciate that T stock isn’t a growth name like Tesla (NASDAQ:TSLA). Its reach is necessarily limited. Instead, making small gains against the competition — which is what they’re doing — is good enough.
After all, you can’t convert more Americans that don’t exist.
High Barrier to Entry Benefits AT&T Stock
Finally, let’s talk about some of the company’s expensive endeavors. Unfortunately, you can’t get away from the fact that, as Martin wrote last week, DirecTV is a stinker. Still, it may be salvageable due to its brand name. For instance, AT&T can promote exclusive content featuring well-known celebrities.
As far as the telecom giant’s move into entertainment and original content, I don’t think the spend is unreasonable. Look, entertainment itself has gotten unreasonable, and yet, people are willing to pay big dollars for the right content. Theoretically, AT&T just needs to stick around to formulate its knockout hit.
Plus, think about this: the barrier to entry to what AT&T is doing is extremely high. Sure, on paper, the investments look outrageous. But this is the new reality. A crowd-funded upstart has no chance of putting a dent in AT&T’s businesses. That’s why I sleep well with my position in the “unsustainable” T stock.
As of this writing, Josh Enomoto is long T stock.
