Source: PaxForex Premium Analytics Portal, Fundamental Insight
AT&T, one of the prominent telecommunications companies in the United States, falls short with a market capitalization of around $110 billion, making it significantly smaller than the tech giants that have achieved trillion-dollar valuations in recent years.
The factors contributing to AT&T's inability to reach a valuation with twelve zeros can be primarily attributed to three key reasons. Firstly, AT&T operates in a mature market with limited growth opportunities, resulting in modest single-digit revenue and earnings growth even during its most successful periods. Secondly, the company's valuations remain depressed as most investors are hesitant to pay a premium for a telecom stock that exhibits slow growth. Lastly, AT&T deliberately reduced its business size over the past two years by divesting assets such as DirecTV and WarnerMedia, along with other non-core holdings. This strategic move aimed to generate additional funds for upgrading their 5G and fiber networks while simultaneously reducing debt.
Hence, it is unlikely that investors are speculating on AT&T becoming a trillion-dollar stock in the near future. However, could AT&T potentially achieve this milestone by 2050? Let's engage in a hypothetical analysis to explore this possibility.
Presently, AT&T's stock is trading at a mere 6 times forward earnings and 0.9 times this year's sales, indicating historically low valuations. These valuations could potentially rise if a new bull market emerges.
However, assuming AT&T's valuations remain stagnant at these low levels, the company would need to grow its revenue and earnings by slightly over 9 times to reach a market capitalization of $1 trillion. To achieve this growth within the next 27 years, AT&T would have to maintain a compound annual growth rate (CAGR) of 8.5% for both revenue and earnings. It is important to note that this growth rate is significantly higher than AT&T's anticipated short-term growth rates. Analysts project a CAGR of 1% for revenue between 2022 and 2025, while the earnings per share (EPS) are expected to turn positive again in 2023 and experience a CAGR of 4% until 2025.
Let's consider a scenario where AT&T's growth stabilizes and investors begin assigning a higher forward multiple of 12 and a forward price-to-sales ratio of 2 to its stock. In this optimistic case, AT&T's current market capitalization would double to $220 billion, and it would only need to increase its annual revenue and earnings per share by 4.5 times to reach a $1 trillion market cap by 2050. However, achieving this target would still require AT&T to maintain a compound annual growth rate (CAGR) of 5.8% for both revenue and earnings.
At present, it appears unlikely that AT&T can achieve either of these growth rates and reach a $1 trillion market cap within 27 years. However, the company could potentially deliver solid returns, potentially doubling or even tripling investments, particularly when factoring in the reinvestment of its substantial dividends. But anything beyond that may be a stretch.
Rather than fixating on the possibility of AT&T becoming a trillion-dollar company, investors should focus on its ability to expand its 5G and fiber networks while enhancing its competitive position against Verizon Communications and T-Mobile US.
AT&T has already demonstrated faster growth in postpaid phone subscribers compared to its larger competitor, Verizon, over the past year. It has also offset sluggish growth in its business wireline segment through the expansion of consumer-facing fiber networks. Additionally, AT&T has been actively expanding its 5G networks to keep up with T-Mobile, which employs lower-band spectrums to provide broader coverage across the United States compared to AT&T and Verizon's higher-band spectrums.
AT&T intensified these efforts after spinning off DirecTV and WarnerMedia, but these strategies also require significant investment. Notably, the company generated only $1 billion in free cash flow (FCF) in the first quarter of 2023, raising concerns about meeting its full-year target of $16 billion in FCF due to heightened investments in 5G and fiber.
While AT&T claims that these expenses peaked in the first quarter, investors should closely monitor its FCF performance throughout the year to assess whether its dividend, which consumed $9.9 billion of its FCF in 2022, is at risk of being reduced. A reduction in the sizable forward yield of 7.2% would remove one of the main incentives for owning the stock. AT&T also needs to make further progress in reducing its high net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio, which stood at 3.2 in the first quarter of 2023, toward its target ratio of 2.5 by early 2025.
Regarding revenue growth, AT&T's core mobility segment must continue to attract new postpaid phone subscribers at a faster pace than Verizon. The expansion of its fiber business should ideally offset the slower growth of its business wireline division.
While AT&T has the potential to stabilize its spending and continue its expansion, it could still be an attractive option for long-term income investing at its current levels. However, it is important for investors to maintain realistic expectations and not anticipate AT&T becoming a trillion-dollar stock within the next few decades.
While the price is below 16.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 15.70
- Take Profit 1: 15.00
- Take Profit 2: 14.00
Alternative scenario:
If level 16.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 16.00
- Take Profit 1: 16.50
- Take Profit 2: 17.00
