AT&T (T 1.60%) posted its first-quarter earnings report on April 20. The telecom giant's revenue rose 1% year over year to $30.14 billion but missed analysts' estimates by $80 million.

Its adjusted earning per share (EPS) dipped 5% to $0.60 but still cleared the consensus forecast by a penny. Those growth rates were broadly stable, but AT&T's stock still plunged 10% after the report. Is this a promising buying opportunity for long-term investors?

An AT&T employee at a retail store.

Image source: AT&T.

Reviewing the key numbers

During the first quarter, AT&T generated 68% of its revenue from its mobility segment, 18% from its business wireline segment, and 11% from its consumer wireline segment. Here's how those three core businesses fared over the past year.

Metric (YOY)

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Mobility revenue growth

5.5%

5.2%

6%

1.7%

2.5%

Business wireline revenue growth

(6.7%)

(7.6%)

(4.5%)

(4.5%)

(5.5%)

Consumer wireline revenue growth 

2%

1.1%

1.4%

2.2%

2.5%

Total revenue growth

2.5%

2.2%

3.1%

0.8%

1.4%

Data source: AT&T. YOY = year over year. 

AT&T's mobility segment added 424,000 postpaid phone subscribers in the first quarter, marking its 12th consecutive quarter of at least 400,000 net adds, and it maintained a low churn rate of 0.81%.

AT&T has added 2.6 million postpaid phone subscribers over the past four quarters. By comparison, its larger rival Verizon only added 201,000 postpaid phone subscribers in 2022.

The business wireline segment remained weak as companies used fewer voice and data services, but the consumer wireline business continued to grow as higher broadband revenue (mainly from fiber) offset declining voice and data revenue.

Adjusted EBITDA is still rising

AT&T's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which excludes a lot of noise from its recent divestments -- actually rose 4% year over year to $10.6 billion during the first quarter. As a result, the adjusted EBITDA margin expanded 80 basis points year over year (and 250 basis points sequentially) to 35.1%.

The mobility and consumer wireline segments both grew their adjusted EBITDA margins year over year, which offset the business wireline segment's declining margins.

The mobility segment's EBITDA margin of 40.7% was its highest first-quarter EBITDA margin ever and indicates AT&T isn't losing pricing power in the wireless market. It attributed that expansion to its growth in subscribers, its rising average revenue per user, and the shutdowns of its legacy 3G networks. The consumer wireline segment margin also rose to 29.5% as it benefited from cost-cutting measures and a growing mix of higher-margin fiber revenue.

AT&T still ended the first quarter with $134.7 billion in net debt -- mainly from its (now divested) acquisitions of DIRECTV and Time Warner -- which gives it a high net debt-to-adjusted EBITDA ratio of 3.22. On the bright side, that still represents an improvement from 3.75 at the end of 2022, and AT&T expects to reduce that ratio to about 2.5 by early 2025.

But free cash flow came up short

AT&T's core growth rates look stable, but it only generated $1 billion in free cash flow (FCF) during the quarter. Most investors were likely expecting around $4 billion since AT&T plans to generate $16 billion in FCF for the full year.

During the conference call, CFO Pascal Desroches attributed that lower FCF to "seasonal and anticipated working capital impacts" with "historically high levels of investments in 5G and fiber." But Desroches also said AT&T is still confident in its full-year outlook for free cash flow of $16 billion or better because most of its costs had "peaked in the first quarter."

That outlook is reassuring, but investors should recall that AT&T already reduced its FCF forecast for 2023 from $20 billion to $16 billion last year. In other words, they should take Desroches' latest comments with a grain of salt -- and shouldn't be too surprised if AT&T reins in that full-year forecast over the next few quarters.

Regardless of what happens, AT&T should still generate adequate cash flows to cover its dividends -- which consumed $9.9 billion of its FCF in 2022. So its high forward yield of 5.6% still looks fairly safe. Verizon, which experienced a much steeper drop in its stock price over the past year, pays a higher forward yield of 6.8%.

The stock still looks dirt cheap

At $18, AT&T trades at just 8 times this year's adjusted EPS and 6 times its adjusted EBITDA. Verizon trades at the same valuations, but it's struggled more than AT&T as it tried to gain new subscribers with margin-crushing promotions.

Analysts expect AT&T's revenue and adjusted EBITDA to grow 1% and 4%, respectively, this year. Those growth rates might seem anemic, but AT&T's stability, high dividend, and low valuation make it a worthwhile investment as the bear market drags on -- even if the market remains fixated on its near-term FCF growth.