After Earnings, Is AT&T a Buy, a Sell, or Fairly Valued?

AT&T T reported its fourth-quarter earnings on Jan. 27. Here is Morningstar’s take on AT&T’s results and the outlook for the stock.

Key Morningstar Metrics for AT&T

• Fair Value Estimate: $26.00
• Morningstar Rating: ★★★
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of AT&T’s Q4 Earnings

AT&T posted year-over-year quarterly revenue growth for the first time since 2023, with sales up 0.9% in the fourth quarter on stabilizing phone upgrade rates and higher phone prices. Wireless services and consumer broadband growth remain solid. Consolidated EBITDA increased 2.2% versus last year.

Why it matters: Another quarter of steady results should boost confidence in AT&T. The firm generated $17.6 billion of free cash flow in 2024. Even with the absence of $2.3 billion of inflows from DirecTV, management expects a 2025 free cash flow of more than $16 billion.

• AT&T added 482,000 net postpaid wireless phone customers during the quarter, down from 526,000 last year on slightly higher churn (customer defections). Adjusted for methodology differences, AT&T outperformed Verizon for the fifth consecutive holiday season.
• Net fiber broadband customer additions were the strongest in two years at 307,000, reflecting pent-up demand following a work stoppage last quarter. Average revenue per broadband customer remains exceptionally strong, increasing more than 6% year over year during the quarter.

The bottom line: We have increased our fair value estimate slightly to $26 per share from $25. With AT&T shares nearing our fair value estimate, we believe Verizon trades at a more attractive valuation.

• Our narrow moat rating on AT&T largely reflects a favorable US wireless industry structure. We expect the firm to gradually gain market share as it rationally competes against Verizon and T-Mobile.
• We expect AT&T will continue generating consistent results as its fiber network expands. The firm claims 40% of its fiber broadband customers now subscribe to its wireless service, up from 39% a year ago and 35% at the end of 2021. Bundling should make customers stickier.

Between the lines: The fixed-line enterprise services business remains weak, with revenue down 10% year over year and segment operating losses widening. Management expects continued sharp declines in 2025.

Fair Value Estimate for AT&T Stock

With its 3-star rating, we believe AT&T’s stock is fairly valued compared to our long-term fair value estimate of $26 per share, which assumes the firm will deliver modest revenue growth and gradually expand margins over the next several years as its wireless and fiber network investments pay off. Our fair value estimate implies an enterprise value of 7.3 times our 2025 EBITDA estimate and a free cash flow yield of about 8%, based on management’s 2025 forecast.

In wireless, we expect AT&T will slowly gain market share over the next few years. We believe postpaid revenue per phone customer will grow modestly amid a relatively stable competitive environment, surpassing $60 per month in 2028 versus less than $56 in 2023. We estimate AT&T generates around $2 billion annually from connected devices, such as cars. We model this revenue increasing roughly 40% over the next five years as things like edge computing gain adoption, but this estimate is highly uncertain. In total, we expect wireless service revenue to increase a bit more than 3% annually on average through 2028, with wireless EBITDA margins holding in the low 40s, as cost-efficiency efforts and benefits from slower customer growth offset rising network operating costs.

Read more about AT&T’s fair value estimate.

Economic Moat Rating

We assign AT&T a narrow moat. Wireless is AT&T’s most important business. Returns on capital in wireless have eroded somewhat in recent years as the firm has spent heavily on wireless spectrum and invested to put that spectrum to use.

We expect wireless returns will remain ahead of AT&T’s cost of capital. Verizon, AT&T, and T-Mobile TMUS dominate the US wireless market, collectively claiming nearly 90% of retail postpaid and prepaid phone customers and supplying the network capacity to support most other players. Solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base requires incremental investment in network capacity, a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about AT&T’s economic moat.

Financial Strength

AT&T’s net debt stood at $126 billion at the end of the third quarter of 2024, leaving net leverage at about 2.8 times EBITDA. This load is far higher than the firm has operated under in the past. Immediately before its current capital deployment binge began in 2012 (with a round of heavy share repurchases), AT&T typically carried leverage of around 1.5 times EBITDA. Still, the firm’s debt load is reasonably similar to Verizon and T-Mobile’s.

AT&T’s dividend payout totals about $8 billion annually, down from $15 billion in 2021. The dividend consumed about 50% of free cash flow in 2023 versus more than 80% in 2021. We think the dividend policy makes sense, leaving substantial excess cash to reduce leverage and make network investments, which we believe is vital to AT&T’s long-term health.

Read more about AT&T’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating of Medium reflects the volatility we expect AT&T investors will face relative to our global coverage. Regulation and technological change are the primary uncertainties facing the company. Wireless and broadband services are often necessary for employment and education. If AT&T’s services are deemed insufficient or overpriced (especially in response to weak competition), regulators or politicians could step in.

Wireless standards continue to evolve, putting more spectrum to use more efficiently. The cost to deploy wireless networks could come down to the point where numerous new firms can enter the market. The cable companies are already making attempts to leverage their fixed-line networks to provide limited wireless coverage. Technological advances could quickly enhance these efforts. While unlikely, in our view, wireless technology could also remove the need for AT&T’s fixed-line networks, killing returns on its fiber investments.

Read more about AT&T’s risk and uncertainty.

T Bulls Say

• Following a period of investment, AT&T will hold a nationwide 5G wireless network with deep spectrum behind it and a fiber network capable of reaching nearly one-fourth of the United States.
• AT&T has the scale to remain a strong wireless competitor over the long term. With three dominant carriers, industry pricing should be more rational going forward.
• Combining wireless and fixed-line networks with new technologies and deep expertise makes AT&T a force in enterprise services.

T Bears Say

• The cost of maintaining dominance in the wireless industry by controlling spectrum has been exceptionally high. AT&T has spent $40 billion over the past three years on licenses, with few prospects for incremental revenue.
• Advancing technology may eventually swamp AT&T’s wireless business, enabling many other firms to enter the market and further commoditizing this service.
• AT&T’s massive debt load could catch up with it. The firm carries far higher leverage than it historically has, and its dividend payout remains high. Lead liabilities could be an additional burden.

This article was compiled by Aman Dagra.