In the final quarter of the calendar year, the typically boring AT&T (NYSE:T) has generated noticeable waves. During management’s conference call for its third quarter of 2019 earnings report, AT&T executives laid out an ambitious plan to clean up its fiscal picture. Unsurprisingly, the strategy involves significant cost-cutting, a move that quickly edged up AT&T stock.
However, the telecom giant met severe resistance shortly thereafter. MoffettNathanson’s Craig Moffett took issue with the company’s overly optimistic strategy. As Moffett stated, “Over much of the last year, AT&T’s stock price has climbed even as its fundamentals have deteriorated.”
Actually, he took it much further than that, labeling AT&T’s pay TV division “a cancer.” Although the language is harsh and perhaps unnecessary, I can understand where Moffett is coming from. Despite some strong potential catalysts, a major headwind affecting T stock is the company’s debt load. Underperforming assets only make this situation worse.
Nevertheless, management appears determined to clean out its financials. For instance, the telecom firm revealed that it undertook an extensive review of its operations to determine which units were worth keeping. Apparently, the leadership team deemed its Puerto Rico and U.S. Virgin Islands as non-core assets, selling them for $1.95 billion. Ultimately, though, the sale should help streamline the heavy organization, benefiting AT&T stock.
Additionally, AT&T worked out an eight-year deal with Telefonica (NYSE:TEF), giving it access to networking equipment in Mexico. Although details have not yet emerged, the agreement is a net positive for T stock under the cost-reduction initiative.
But the big one for AT&T stock is long-term debt. In Q3 2019, it measured $153.6 billion. Management asserts it can retire the debt associated with the Time Warner acquisition. Is this initiative credible?
AT&T Stock to Enjoy 5G Tailwinds
Interestingly, this question underlines the bullish thesis for T stock, according to Mad Money host Jim Cramer.
According to Cramer, AT&T stock is a name you don’t want to panic on … just yet. That’s because activist investment firm Elliot Management has a significant stake in the telecom behemoth. Despite MoffettNathanson’s extreme bearishness, AT&T has a chance for continued meaningful upside so long as management rights the ship.
If not, Cramer argues, Elliot Management can strike T stock hard.
It’s not the first time that the activist firm has influenced the company’s decision-making. It probably won’t be the last, which likely augurs well if you’re an AT&T stock holder.
Nevertheless, I think the bigger issue is the 5G rollout. Based on data compiled by Statista.com, by next year, 5G adoption in North America will account for 4% of all mobile connections. Currently, we’re looking at about a 1% adoption rate.
By 2021, though, we’ll see substantial adoption at 14% (See chart at right). In the following year, telecom experts forecast a 24% pickup rate. Then, over the next three years, we’ll see an average growth rate of 25%, culminating in 46% 5G adoption in 2025.
Obviously, 5G is a huge deal for AT&T as companies like Apple (NASDAQ:AAPL) and Samsung release their 5G-capable smartphones. However, a more subtle — but still critical — point is that the opportunity for telecoms is greatest early on.
Specifically, from 2020 through 2022, the year-over-year growth in 5G adoption rate will increase an average of 207%. From 2023, the average growth in adoption rate slips to 25%. As things practically stand, AT&T and rival Verizon (NYSE:VZ) are the only two players that can competently roll out 5G now.
Pay TV Not a Complete Disaster
In my last writeup on AT&T stock, I discussed that pay TV, while challenging, isn’t entirely without substance. Granted, people — including yours truly — are ditching tethered TV for the connected or streaming variety.
Still, as I mentioned, streaming is going through its growing pains. The infrastructure isn’t quite as intuitive as the connected TV providers would have you believe. Additionally, it’s much easier to watch live programming and sports through traditional, linear means.
Plus, I believe that T stock has an event-based tailwind in the form of the 2020 presidential election. The 2016 election was riveting stuff. Unless the media powers-that-be jump the shark with wall-to-wall impeachment programming, I’d bet that 2020 would be even more dramatic. After all, President Trump once suggested that his supporters boycott AT&T, CNN’s parent company.
That alone makes CNN must-watch television. Hopefully, this should translate to a higher price for T stock.
Thus, with management undertaking a vital cost-cutting strategy, along with a lucrative 5G tailwind, AT&T stock is getting interesting. The political drama that is virtually guaranteed to ensue just adds more gravy to the pot.
As of this writing, Josh Enomoto is long T stock.