AT&T Stock Looks Like a Bargain Ahead of Its Transition

Investing in AT&T (NYSE:T) used to be a pretty clear-cut decision, giving shareholders exposure to one of the country’s largest telecom businesses. It became murkier when the company’s former CEO, Randall Stephenson, made several entertainment-related acquisitions, saddling the company with a massive amount of debt. In fact, the company’s $85 billion purchase, plus debt, of Time Warner in 2018 has been described as “one of the greatest corporate strategy blunders of recent decades.” And T stock has underperformed its peers since closing the deal.

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But under the company’s current CEO, John Stankey, AT&T is looking to get back to what it does best. It is sharpening its focus on wireless and fiber internet while divesting its recently acquired media assets. The company spun off DirecTV and is in the process of merging its WarnerMedia entertainment division with Discovery (NASDAQ:DISCA).

Investors don’t seem to be expecting a smooth transition. Since the merger was announced in May, T stock is down around 24%. However, there are multiple reasons to consider an investment here.

As the telecom giant seeks to get back to its roots, the company is posting the strongest customer growth numbers in over a decade. This leads me to believe today’s prices represent an excellent bargain.

What’s more, when WarnerMedia and Discovery merge next year, AT&T shareholders will receive Warner Bros. Discovery shares representing 71% of the new company.

AT&T is Crushing the Wireless Competition 

While AT&T’s foray into the entertainment world may have been misguided, the company’s wireless business is rock-solid.

AT&T announced its third-quarter results on Oct. 21. Postpaid net additions for the quarter totaled 928,000, the most for a quarter in more than a decade. According to FactSet, analysts were only expecting 560,000. And AT&T had a churn rate of just 0.72%.

AT&T’s customer gains also significantly outperformed its rivals. For the third quarter, T-Mobile (NASDAQ:TMUS) added 673,000 new phone customers, while Verizon Communications (NYSE:VZ) gained 699,000. Additionally, a Deutsche Bank analyst noted that 47% of new postpaid phone customers for the first nine months of the year went to AT&T, saying that would have been “near inconceivable just a few years ago.”

Revenue for the third quarter came in above estimates, as well, although it declined 5.7% year over year to $39.9 billion due to the DirectTV spinoff.  Revenue for the company’s mobility division rose 7% from a year ago to $19.1 billion. This was largely thanks to a 4.6% jump in service revenue on subscriber additions and increased international roaming revenue as travel picked back up.

Finally, AT&T is in the early stages of its 5G rollout, which could provide a healthy growth runway due to the sale of new 5G equipment.

AT&T Shareholders to Get a Stake in a New Media Giant

As I mentioned above, when the WarnerMedia and Discovery deal closes in mid-2022, AT&T shareholders will be receiving shares of Warner Bros. Discovery. The new company will be one of the largest media companies in the United States. In addition to the Warner Bros. film and television studio, the new company will own HBO, CNN, TBS, TNT, Discovery Channel, Animal Planet, TLC and the Food Network.

While WarnerMedia struggled during the pandemic, it is back on the right track.  In AT&T’s Q3 report, the company noted the division saw a 14.2% year-over-year revenue increase to $8.4 billion. And operating income was up 15.2% from a year ago to $2 billion.

WarnerMedia’s comeback has been driven in part by the success of its HBO Max streaming service. Since it went live in mid-2020, subscriber numbers and WarnerMedia’s direct-to-consumer revenue have been on the rise. Thanks to strong international growth, the company ended the third quarter with 69.4 million global HBO Max and HBO subscribers, up 2.8% over the prior quarter and 22% from a year ago.

Discovery is also bouncing back from the pandemic with revenue and customers on the rise following the launch of its own streaming service.

The combination of Discovery and WarnerMedia makes far more sense than the matchup between Warner and AT&T did. Investors are likely to benefit from the company’s natural synergies and growth potential.

The Bottom Line on T Stock

While I’m bullish on T stock, I wholeheartedly expect the company to hit some speed bumps during its transition. Spinning off WarnerMedia is the right move long-term. But it will make for some tough year-over-year comparisons in the quarters immediately following the deal’s close, similar to what we’re seeing following the DirecTV spinoff.

Furthermore, there is AT&T’s debt. The upcoming merger is expected to allow AT&T to reduce its debt load by $43 billion. However, the buildout of the company’s 5G network will be costly. For instance, earlier this year, it was revealed AT&T spent $23.4 billion on licenses for wireless spectrum.

AT&T ended the third quarter with more than $179 billion in debt. However, the company generates colossal free cash flows, which are on track to hit $26 billion this year.

T stock is an investment that should reward long-term investors as the company emerges stronger from its streamlining.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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