AT&T's stock trades at a notable premium to Verizon's. Should you still buy?

By Emily Bary

Barclays just downgraded AT&T's stock over concerns about industry competition and debt levels

AT&T's stock has outperformed the S&P 500 over two years.

After burning investors in the past with debt-fueled media deals, AT&T Inc. has staged a transformation that's been well received by investors. The company has refocused its business on telecommunications over the past few years, and the stock has climbed to the point where it now trades at roughly its highest premium to rival Verizon Communications Inc. when looking back almost two decades.

So what should investors do? Barclays analyst Kannan Venkateshwar wrote Wednesday that AT&T's "operational improvements" are now largely reflected in its stock (T), which is up 87% over the past two years as the S&P 500 SPX has advanced 56%. AT&T's continued path to outperformance could get harder from here, according to Barclays, with "industry tailwinds now starting to moderate and growth optionality being fully priced in."

Venkateshwar downgraded AT&T's stock to equal-weight from overweight, while keeping a $30 target price.

AT&T saw "quite healthy" subscriber numbers in the first half of the year, Venkateshwar noted, and its leadership team has signaled that the second half of the year could be similar. But investors should monitor trends around phone upgrades, which aren't all they're cracked up to be for wireless companies. New phones can get people to switch wireless carriers, but Barclays sees the environment getting more promotional, which would weigh on profit margins.

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Venkateshwar flagged that, while AT&T this year could see a comparable level of net customer additions to what it recorded in 2020, it could take 25% more gross additions to get there, which carries a margin impact. He expressed worries about general trends in the wireless industry, including that cable companies are placing greater emphasis on their wireless businesses and driving up competitive activity.

AT&T "is likely to see elevated churn and upgrade rates which in turn will pressure margins. Investors are likely to take a more cautious view next year because of the expected iPhone form factor changes and consequent impact on free cash flow and margins," Venkateshwar wrote.

He also said investors will be taking a closer look at AT&T's balance sheet. The company drove leverage down in recent years after taking on debt to fund deals like the since-unwound Time Warner acquisition, but AT&T is now buying spectrum from EchoStar, which could "increase headline leverage."

Don't miss: Why AT&T just struck a $23 billion spectrum deal with EchoStar

"This is likely to cap upside valuation over the near term, especially as upside to numbers from present levels may be more limited and the growth mix comes with a heavier margin drag for the industry as a whole," Venkateshwar added. "AT&T will of course benefit significantly from lower cash taxes but a significant proportion of this near-term upside has now been committed to spectrum purchase."

He highlighted that AT&T's stock is trading approximately at its highest premium to Verizon's stock (VZ) in nearly two decades on the basis of enterprise value to earnings before interest, taxes, depreciation and amortization.

-Emily Bary

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10-01-25 1910ET