We believe AT&T’s T renewed focus on telecom, along with a stronger financial position and a clear plan to invest in its networks, will serve investors far better than its previous media strategy. Aggressively extending fiber and 5G coverage to more locations builds on the company’s core assets—its existing network and customer relationships—and should allow AT&T to gradually expand its share of telecom spending. AT&T is the third-largest wireless carrier in the United States, but we believe it has adequate scale, spectrum, and financial resources relative to Verizon VZ and T-Mobile TMUS to generate solid profitability. Also, we believe the industry’s structure has improved, with three major players that have little incentive to price irrationally in search of short-term market share gains.
Key Morningstar Metrics for AT&T
Economic Moat Rating
AT&T has slimmed down over the past two years, undoing the majority of the strategic moves made during the prior decade. At its peak, we estimate the firm had roughly $450 billion of invested capital employed in the business ($300 billion excluding goodwill). With the conversion of DirecTV into an equity investment and the spinoff of WarnerMedia, invested capital now stands around $330 billion ($250 billion excluding goodwill), with investment in wireless spectrum partially offsetting the divested assets. We don’t believe AT&T enjoyed material synergies between its telecom and media operations, and we were happy to see these assets split into entities that will have greater strategic flexibility and focus. We award AT&T a narrow economic moat rating based primarily on cost advantages in the wireless business. Elements of efficient scale also benefit both the wireless and fixed-line businesses.
Fair Value Estimate for AT&T Stock
Our $25 fair value estimate assumes that AT&T can deliver modest but gradually improving revenue growth and expanding margins over the next several years as its wireless and fiber network investments pay off. Our consolidated estimates fall short of management’s expectations, which include 2023 EBITDA of $43.5 billion-$44.5 billion and free cash flow of $20 billion. We peg these figures at about $42 billion and $16 billion, respectively. Our fair value estimate implies an enterprise value of 8.1 times our 2022 EBITDA estimate and a 7% free cash flow yield.
Risk and Uncertainty
Regulation and technological change are the primary uncertainties facing AT&T. Wireless and broadband services are often considered necessary for social inclusion, in terms of employment and education. If AT&T’s services are deemed insufficient or overpriced, especially if in response to weak competition, regulators or politicians could step in. The company is also still responsible for providing fixed-line phone services to millions of homes across the United States, including many in small towns and rural areas. It could be compelled to invest more in rural markets even if economic returns are insufficient.
AT&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 U.S.
- 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.
AT&T Bears Say
- The cost of maintaining dominance in the wireless industry by controlling spectrum has been exceptionally high. AT&T has spent $35 billion over the past two years for licenses with few prospects for incremental revenue.
- Advancing technology will swamp AT&T’s wireless business, enabling a host of companies to enter the market, further commoditizing this service.
- AT&T’s massive debt load will eventually catch up with it. Even after spinning off Warner with a huge amount of debt, AT&T carries far higher leverage than it has historically.
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.