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The Silver Lining in AT&T's Murky Future

By Robert Izquierdo – Aug 27, 2020 at 9:32AM

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The telecom giant has lost billions this year. Learn why it's still a worthwhile investment.

AT&T (T -2.12%) has historically served as a stable investment, but those days are now at risk. Once the coronavirus pandemic struck, AT&T's revenue plunged.

Combine a pandemic with some concerning company performance metrics, and AT&T starts to look like a questionable investment. But that's not all. AT&T faces an increased threat from rival T-Mobile, which strengthened its position in the competitive U.S. market through a merger with Sprint this year.

Even after AT&T weathers the pandemic's impact, the company's challenges mean it has an uphill battle ahead. Does it make sense to invest in this telecom icon?

Closeup of a notepad with the words "disaster plan" written on the cover.

Image source: Getty Images.

Today's state of affairs

Let's unpack AT&T's challenges today. Even before the pandemic, critics were concerned with the company's massive debt load, totaling $152 billion at the end of the second quarter. AT&T took on this debt to acquire DIRECTV and Time Warner in an effort to build a media empire. Paying this debt down has been more difficult because of the pandemic and the ensuing revenue decline.

AT&T's media division, WarnerMedia, was particularly hard hit by the pandemic, causing the company's earnings to suffer. WarnerMedia witnessed its revenue drop a whopping $2 billion year-over-year in the second quarter. The division's business model depends on television advertising and box office receipts, which both dried up when the pandemic caused the shutdown of sporting events and theaters.

These metrics are grim, but more concerning were the results for the company's telecom business, its one dependable revenue source. Second-quarter results revealed AT&T is steadily losing wireless customers over time.

Its postpaid subscribers, the most valuable type of wireless subscriber, are at their lowest point in two years. Total postpaid subscribers dropped to 74.9 million in Q2 from 75.5 million last year and 76.5 million in 2018. This contributed to AT&T's wireless service revenue dropping 1.1% in Q2 after four consecutive quarters of growth.

Opportunities remain

AT&T's troubling Q2 results combined with its debt load form a murky future. But many factors point to opportunities for the storied telecom titan.

Free cash flow remains strong. This allows AT&T to continue paying down debt while funding its high-yield dividend.

  Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Free Cash Flow $8.8 billion $6.2 billion $8.2 billion $3.9 billion $7.6 billion

Data source: AT&T.

The company completed a nationwide rollout of its faster 5G network in July. The 5G benefits extend beyond improved internet speeds and include the ability for more devices to connect online while reducing lag time. AT&T can capture greater revenue through 5G-enabled device sales and premium pricing for 5G subscriptions.

AT&T also launched its new streaming service, HBO Max, at the end of May. The service provides AT&T with several advantages:

  • HBO Max builds on the popular HBO brand, but appeals to a broader audience by folding in entertainment content from across WarnerMedia's assets, such as the Friends TV show.
  • It's offered through several subscription options, including a bundle with 5G access, to incentivize purchases at a higher price point.
  • It provides a differentiated offering over AT&T's telecom rivals.

HBO Max is tracking toward company targets for subscribers, activations, and revenue. It had over 36 million subscribers at the end of the second quarter.

AT&T also owns a digital advertising platform, Xandr. New CEO John Stankey plans to use Xandr's technology to deliver an advertising-supported streaming entertainment option next year, opening up new revenue opportunities.

The bottom line

While challenges exist, AT&T's bright spots remain compelling. It spent $1 billion to acquire new 5G spectrum assets in the second quarter, strengthening its 5G position. Once the pandemic passes, WarnerMedia revenue will recover.

AT&T's bundling of HBO Max and higher-priced wireless plans is working. According to Stankey, "We're giving customers a reason to go up in the more robust unlimited plans, and we're already seeing that penetration increase."

The company has the pieces to retain its fair share of the competitive U.S. telecom market. Investors can enjoy income from the company's high-yield (currently at 6.94%) dividend as they wait to see AT&T's plans return the company to its pre-pandemic trajectory, such as 2019's record cash from operations and free cash flow of $48.7 billion and $29 billion, respectively. These factors create the silver lining in AT&T's challenging year, bolstering the case that the stock is a buy.

Robert Izquierdo owns shares of AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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