3 Reasons AT&T's Stock Could Fall

AT&T investors could be in for a rude surprise if any of these three negative catalysts are triggered.

Aug 28, 2014 at 10:10AM
Att Hq Dallas Wikimedia Commons

AT&T headquarters in Dallas, TX. Source: Wikimedia Commons.

What's stopping AT&T (NYSE:T) shares from rising to the sky?

Recently, I took a look at three reasons AT&T's stock could rise in the foreseeable future. But it's not all sun and blue skies ahead for Ma Bell. Today, I'll share the three biggest reasons AT&T shares could move in the opposite direction.

The DirecTV deal falls through
The biggest reason to be optimistic about AT&T right now is the pending buyout of satellite broadcaster DirecTV (NASDAQ:DTV).

If approved and executed, the deal will add international growth, diversify AT&T's domestic business, and boost AT&T's annual cash flows. Taken together, these benefits make it a game-changer that could add about $4 billion to AT&T's annual free cash flows. The company generated about $14 billion of free cash in 2013, so DirecTV is poised to provide 29% boost to the cash-based bottom line.

And that's before you consider the potential for revenue growth in South and Central America, where DirecTV is a serious presence -- and AT&T is not. This deal alone can keep AT&T's growth going for years to come, even if the company can't find any other business catalysts.

On the flipside, it's a serious business risk. If regulators or shareholders put the kibosh on AT&T's DirecTV buyout, the company will miss out on all of these benefits.

It could be worse. The $49 billion deal does not come with a breakup fee, in contrast to the $6 billion fee that AT&T paid to T-Mobile (NASDAQ:TMUS) when that proposed deal fell through in 2011. Once bitten, twice shy -- AT&T will not feel that would burn again.

Still, the company and its investors are banking on the DirecTV deal. Losing this potentially huge package of catalysts would be terrible for AT&T's business fundamentals, not to mention its share prices.

Directt

Original sources: AT&T and DirecTV.

The DirecTV deal doesn't deliver on its promises
What if the DirecTV deal is approved, but AT&T fails to deliver on its promises?

Expanding south of the border won't be easy, even with DirecTV's head start. Keep in mind AT&T is a huge and potentially multinational giant already, with assets to match. Even so, the company has not felt confident enough to start a serious push outside U.S. borders.

In 2013, AT&T's non-U.S. interests were too small to show up as a separate geographical division in company filings. A partnership with Latin American wireless operator America Movil added just $532 million to AT&T's operating income last year -- a mere 1.7% of the American telecom's $30.5 billion operating profits.

So, it's not like AT&T has a ton of experience with international growth. That's what DirecTV is supposed to bring to the table.

As for the immediate cash flow boosts, it will be easy enough to save $1.6 billion the year in cost cuts and efficiencies, but who's to say DirecTV's cash flows will continue to grow?

Yes, DirecTV's cash earnings have spiked in recent quarters. But the company is only back to where it was five years ago. In the meantime, cash flows dried up substantially.

DTV Free Cash Flow (TTM) Chart

DTV Free Cash Flow (TTM) data by YCharts.

The traditional broadcasting business is under attack from online entertainment sources, led by Apple, Amazon.com, and Netflix. Many of the programs that used to keep consumers loyal to their cable or satellite service are also available online nowadays. If Netflix doesn't have your favorite show, maybe Amazon Prime offers it for a similar monthly subscription fee. And if all else fails, Amazon and Apple's iTunes will be happy to sell or rent pretty much anything your heart desires.

So, DirecTV and its old-school friends depend on time-sensitive content like news and sports packages. What happens if Amazon or Apple figure out how to sell and deliver live broadcasts online? The trickle of cord-cutters could turn into a torrent, undermining the cash-generating value of a satellite broadcast service.

Cable and satellite services may very well become a footnote in TV history in just a few short years. In that case, AT&T will have paid nearly $50 billion for a hollow asset.

Hungry second-tier telecoms leave AT&T flat-footed
The smartphone boom is ending, as AT&T and other telecoms saturate their sales channels with smart devices. 77% of AT&T's customers already use a 4G-capable smartphone. 

So, the battle moves on to the next Next Big Thing. 5G networks are still a few years away, pending another large radio spectrum auction in 2015. Wearable computing might be the next mobile revolution, but nobody has delivered any earth-shaking hit devices in this market yet. Whatever's next, AT&T had better stay on top of the new trend.

That's not as easy as it sounds. Smaller operators T-Mobile and Sprint (NYSE:S) are already introducing aggressive pricing plans, jockeying for position in the next mobile era. Following their lead will put pressure on AT&T's profit margins; opting out of the price war will lead to customer defections.

AT&T is not powerless. The company has unmatched assets and experienced leadership on hand. But the next few years could be brutal if Ma Bell is dragged into a race to the bottom. Or even worse, if a smaller rival figures out how to ride the next wave of mobile computing better than AT&T does.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early, in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Anders Bylund owns shares of Amazon.com and Netflix. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers