It has been a tough few years for AT&T (NYSE:T) stock. Specifically, it has been a tough decade for the telecom and media giant, as T stock entered the decade just under $30. T stock currently trades hands around $34, up about a sluggish 20% since 2010.For comparison purposes, the S&P 500 is up 170% since the start of 2010.
Why the huge under-performance in AT&T stock? A few reasons. First, cord-cutting killed the company’s pay-TV business. Second, price competition in the wireless industry created substantial subscriber and margin headwinds for the company’s mobile business. Third, the company has loaded up on debt, and doesn’t have much to show for it … yet.
AT&T’s net profits in 2010 were around $19 billion. In 2018, they were also around $19 billion. Thus, it makes complete sense that T stock has gone essentially nowhere during that stretch.
There is reason to believe that AT&T’s profit trend is set to change course, and that profits will actually start to head consistently higher over the next few years. As they do, AT&T stock should concurrently move higher, too.
Why will this happen? Three big reasons:
5G Is Coming
First and foremost, the 5G revolution is coming, and this revolution has the potential to supercharge profit growth in AT&T’s wireless business.
AT&T’s wireless business over the past decade has been pretty good. The company has consistently grown its subscriber base, revenues, margins, and profits. But, growth has been tepid. From 2010 to 2018, wireless contribution profit rose from $15.3 billion, to $21.7 billion, which equates to a very pedestrian 4% compounded annual growth rate.
That profit growth rate will likely move substantially higher over the next few years. 5G is coming. That means that the next big thing in wireless coverage is coming, which implies a ton of phone and network upgrades over the next few years. Further, 5G is launching at a time wherein every device is becoming connected, so not only will there be a ton of upgrades over the next few years, but there will also be a ton of new devices which come online.
All that means more revenue for AT&T’s wireless business and a good-looking T stock. On top of that, the launch of 5G will give AT&T more pricing power (since it’s a higher-quality service), so margins should move higher, too.
Net net, the mainstream roll-out of 5G over the next few years should supercharge profit growth in AT&T’s wireless business.
HBO Max Will Offset Cord Cutting Losses for T Stock
Second, AT&T is set to launch its best streaming product yet, HBO Max, which has enough content firepower to attract subscribers in bulk and help offset the company’s persistent cord cutting losses.
AT&T has made multiple forays into the streaming world over the past few years. None of them have been that good, mostly because they haven’t had a sufficient content value prop to compete with the likes of Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Hulu, and others.
But, with acquisition of WarnerMedia, AT&T has amassed a content war-chest which is finally big enough to compete in the streaming world. We are talking HBO, Cinemax, TBS, TNT, CNN, Cartoon Network, Warner Bros movies (like the “Harry Potter,” “Dark Night,” and “Lord of the Rings” series), and DC Entertainment.
AT&T is going to package all that content into one streaming service, HBO Max, which will launch in spring 2020. In other words, AT&T is finally going to market with a streaming product that has enough content to attract subscribers in bulk.
In so doing, AT&T will finally start to build a formidable presence in the streaming space starting in 2020. This pivot will ultimately help the company offset persistent cord-cutting losses, so that profit losses in the media business over the past few years, will turn into profit gains over the next few years.
AT&T Stock Is Dirt Cheap With a Big Yield
Third, profit improvements in the company’s media and telecom businesses should spark a big rally in T stock because the stock is simply too cheap for its own good.
As mentioned earlier, AT&T stock has under-performed dramatically over the past decade. It’s due for a big rally. More than that, the stock is dirt cheap at less than 10-times forward earnings. The five year average forward earnings multiple on T stock is around 12, while the market average multiple is around 17-times forward earnings.
Even further, AT&T stock features a sky-high 5.9% yield, versus a 1.9% yield of the S&P 500 and five year average yield on T stock of 5.4%.
Broadly, then, with T stock you have an equity that
- has lagged the market for a long, long time;
- trades at a huge discount to its historically average valuation and the market average valuation;
- has a huge yield which is above-average and dwarfs the market yield; and
- is on the verge of substantial profit trend improvements.
That’s a recipe for success which implies AT&T stock is gearing up for a breakout over the next few quarters and years.
Bottom Line on T Stock
I really like AT&T stock. The market appears to be writing off AT&T as a company mired in cord-cutting headwinds. But, much like Disney (NYSE:DIS) stock shook off those headwinds in 2019 thanks to favorable internal developments on the streaming front, T stock will also shake off these cord-cutting headwinds in 2020 thanks to similar streaming developments and a 5G boost.
As of this writing, Luke Lango was long T and NFLX.