Source: PaxForex Premium Analytics Portal, Fundamental Insight
This year's stock market volatility makes telecom titan AT&T look like an attractive investment. It is a grown, dividend-paying company with a record of solid earnings, providing some stability amid the market turmoil.
AT&T's impressive performance over the past few quarters gives it even more reason to invest. However, the company's stock recently hit a 52-week low, and it's not just the overall stock market drop that has pushed the share price down.
Before deciding on a stock, it's worth examining the factors that make AT&T an attractive buy, as well as the reasons why investors might want to cross it off their investment lists.
AT&T has undergone a transformation under CEO John Stankey. Before he became CEO in 2020, AT&T spent billions of dollars building an entertainment empire. That decision plunged the company into big debt just when it needed to invest billions more to expand its 5G wireless network.
Entertainment companies spend billions to produce streaming content. AT&T couldn't keep up with the times while also dealing with the costly construction of its 5G network.
So Stankey sold AT&T's entertainment assets, taking the company back to its telecommunications roots. The last of its major media assets merged with cable company Discovery in April to form Warner Bros. Discovery. This transformation allows AT&T to focus time, money, and resources on its core telecommunications business.
AT&T's renewed focus on its telecommunications operations has been successful. In the previous quarter, the company added 813,000 new cell phone subscriptions in the coveted postpaid customer segment, the telecommunications industry's most valuable customers. This was the highest Q2 performance in a decade.
AT&T's Q2 results were not an abnormality. The company ended 2021 with more new postpaid subscribers than in the previous 10 years combined.
This year, AT&T intends to do even better. In the first half of 2022, AT&T had a net increase of 1.5 million postpaid phones, surpassing the 2021 figure of 1.4 million.
This significant increase in customer numbers contributed to revenue growth. AT&T's revenues last quarter were $29.6 billion, up 2.2% from last year ($29 billion), adjusted for divested businesses. The U.S. telecommunications market is highly competitive, so AT&T's continued success in attracting customers is impressive.
AT&T has also been successful in growing broadband customers with its faster and more reliable fiber-optic Internet service. In Q2, consumer broadband revenues grew 5.6% YoY thanks to an almost 28% growth in fiber sales.
With the rise in remote work during the pandemic, demand for better home Internet increased. This has helped AT&T steadily increase broadband revenues over the past two years.
Broadband revenues totaled $2.4 billion, as the net addition of new fiber customers in the first half of 2022 grew nearly 26% year over year. Although fiber is still a small revenue stream compared to the wireless business, AT&T said it expects further customer growth "for the foreseeable future."
That estimate is not an exaggeration. Broadband is projected to grow from $84.5 billion this year to more than $102 billion in 2027. AT&T's fiber business has been helped by the U.S. government's passage last year of the Infrastructure Investment and Jobs Act, which allocates $65 billion for broadband expansion.
In spite of the company's success, AT&T stock has been on a downward trend since the company posted its Q2 results on July 21. The main factor in the stock's decline was AT&T's announcement of a $2 billion reduction in its 2022 free cash flow (FCF) forecast.
Costs rose more than expected, while the company spent $1.7 billion more than it did in 2021 to expand its 5G and fiber networks, forcing a lower FCF forecast. The ensuing drop in the stock price is understandable, given FCF's role in funding dividend payments.
This news puts an end to AT&T as a profitable stock. Any investor considering AT&T because of its dividend, which offers an attractive yield of more than 6%, will need to keep an eye on the company's FCF situation in the coming quarters.
AT&T is facing challenges after returning to pure telecom earlier this year, but it still compares favorably with rival Verizon.
However, if AT&T's free cash flow problems continue into the second half of 2022, the company's stock could fall. The best thing to do now is to wait for Q3 results to assess whether free cash flow is on an alarming trend.
Q3 results will be released on Oct. 20. It may be wise to refrain from making any investment decisions until then.
As long as the price is below 17.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 14.72
- Take Profit 1: 14.00
- Take Profit 2: 12.00
Alternative scenario:
If the level of 17.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 17.00
- Take Profit 1: 18.00
- Take Profit 2: 20.00
