HBO, Game of Thrones and the AT&T Stock Price

There’s no shortage of worries when it comes to AT&T (NYSE:T). The T stock price hasn’t moved in years. In fact, shares touched a seven-year low in December, and trade below where they did at the beginning of 1998. AT&T is the most indebted company in the world. Growth remains meager.

T stock above $30 isn't justified

Indeed, I’ve been a longtime skeptic toward T stock. I argued as recently as last month that shares should sit below $30. From a broad standpoint, the concern is that AT&T simply isn’t winning.

In Mobility, the company is losing market share to Verizon Communications (NYSE:VZ) and T-Mobile (NASDAQ:TMUS). The Time Warner acquisition remains reliant on the Turner networks — likely victims of cord-cutting. DirecTV is hemorrhaging subscribers. The streaming service is late to market, and seems to have little chance of dislocating Netflix (NASDAQ:NFLX) and Hulu, let alone the coming offering from Disney (NYSE:DIS).

A little over two weeks after the finale of HBO’s Game of Thrones, some investors have added that network to the list of worries. Will subscribers abandon the network, which potentially is AT&T’s most attractive asset? Did poor reviews for the finale undercut future opportunities for the franchise?

They are interesting questions from a business standpoint. But in fact, Game of Thrones — and even HBO — aren’t necessarily that material to the AT&T stock price. That’s good news, but it’s also part of the problem.

Game of Thrones and T Stock

Viewers did not enjoy the GoT finale, or even the last season. As Vox pointed out, the finale has far and away the lowest rating on IMDB of any episode in the series. A petition at to remake the final season “with competent writers” has received 1.6 million signatories.

Game of Thrones hasn’t yet really moved T stock. Indeed, despite initial backlash to the ending, shares actually increased modestly the next day. But that hasn’t stopped market participants from voicing concern about the franchise, and its impact on HBO.

Most notably, without GoT, HBO doesn’t have a headline blockbuster series with which to attract subscribers. The finale itself set a record as the most-watched HBO show ever. That’s a truly impressive accomplishment in a time of increasing audience fragmentation. No doubt some of the 19 million viewers are subscribers who are now at risk of canceling.

HBO could, of course, keep or win back those subscribers with expansions to the GoT universe. Three successor shows reportedly are in the works. But the disappointment of the finale might keep those viewers from returning.

And it’s that risk that could weigh on T stock. At Marketwatch, columnist Brett Arends went as far as to breathlessly argue that AT&T shareholders would have a case to sue the company. “AT&T’s management has just needlessly thrown away a prize asset for no good reason,” he wrote in arguing against the decision to even end the series. Arends compared that decision to the infamous “New Coke” rollout by Coca-Cola (NYSE:KO) back in the 1980s.

Meanwhile, after the apparently disappointing season, the new offerings are now tainted. “The question now is whether the franchise has much magic left anyway,” he added.

Does HBO Matter to the AT&T Stock Price?

Arends furthered his point by noting that AT&T CEO Randall Stephenson specifically called out HBO and GoT in justifying the $85 billion acquisition of Time Warner back in 2016. From that standpoint, the GoT misstep — if it was a misstep — presents a real risk to AT&T stock.

And subscriber losses are a risk. HBO’s direct subscribers contribute some $15 per month, or $180 per year in revenue each. Incremental subscribers are gained and lost at exceedingly high margins. The cost of adding a subscriber is minimal: it doesn’t make HBO’s programs more expensive, and incremental infrastructure costs are modest as well. But the reverse is true of losing a subscriber: most of the revenue dollars fall away from profits.

All that said, HBO is only a small part of the AT&T empire. In the first quarter, according to figures from the 10-Q, HBO contributed just 5.6% of total segment-level profit. EBITDA is in the range of $2.4 billion annually.

Two factors do amplify the importance of HBO to T stock. First, the company has a tremendous amount of debt. And so, HBO’s contribution to the equity is more important than its contribution to the business. Take away HBO’s profits, all else equal, and the T stock price would drop close to 10%.

Secondly, HBO is probably the most expensive asset AT&T has. The $2.4 billion in EBITDA suggests the business could be worth as much as $25 billion. That’s assuming a 12x EBITDA multiple, and that a standalone HBO would have some level of corporate costs. That figure is a little over 10% of the current market capitalization of $231 billion.

HBO Is Neither Catalyst nor Headwind for AT&T

Still, modest or even significant erosion in HBO subscribers doesn’t necessarily mean enormous downside for AT&T stock. Even the loss of five million subscribers — nearly 25% of the GoT finale viewers — would only hit revenue by about $900 million. Full-year segment-level profit should be over $40 billion.

While that might seem like good news in the context of AT&T stock, it also currently highlights the broad problem. HBO truly is AT&T’s most impressive asset. It would be hugely in demand if the company were to sell it (though it obviously won’t). Also, the markets would dearly value the network if the company spun it off.

Yet AT&T’s most impressive asset doesn’t matter all that much in the context of the total business. Wireless will ultimately drive T stock, where market growth is minimal and AT&T’s share is shrinking. The merger between Sprint (NYSE:S) and T-Mobile could help, though the forced sale of Boost Mobile might mean a fourth large player like Comcast (NASDAQ:CMCSA) joins the industry. Other key contributions come from Turner and DirecTV, both of which likely are in secular decline.

Subscriber losses at HBO won’t help the cause, to be sure. But they simply don’t change the case all that much. HBO isn’t going to move T stock significantly, which raises the question of what actually will.

As of this writing, Vince Martin has no positions in any securities mentioned.

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