AT&T (T 1.61%) is one of the largest telecom companies in the United States, but it only has a market cap of about $110 billion. That makes it much smaller than the tech titans that have entered the trillion-dollar club over the past few years.
AT&T's inability to reach a 12-zero valuation can mainly be attributed to three things. First, it's a slow-growth company in a mature market, and it usually only squeezes out low-single-digit revenue and earnings growth during its best years. Second, AT&T's valuations remain low because most investors simply won't pay a premium for a slow-growth telecom stock. Lastly, AT&T intentionally shrank its business over the past two years by spinning off DirecTV and WarnerMedia -- as well as many of its other non-core assets -- to free up more cash to upgrade its 5G and fiber networks while reducing its debt.
Image source: AT&T.
That's why most investors probably aren't wondering if AT&T will become a trillion-dollar stock in the near future. But could AT&T hit that milestone by 2050? Let's do the hypothetical math to find out.
How fast would AT&T need to grow to achieve a $1 trillion valuation?
AT&T currently trades at just 6 times forward earnings and 0.9 times this year's sales. Those valuations are historically cheap, and they could rise if a new bull market starts.
But assuming AT&T's valuations stay frozen at these low levels, it would need to grow its revenue and earnings by just over 9 times for its market cap to hit $1 trillion. For that to happen over the next 27 years, AT&T would need to grow its revenue and earnings at a compound annual growth rate (CAGR) of 8.5%. That's much higher than AT&T's near-term growth rates. Between 2022 and 2025, analysts expect its revenue to grow at a CAGR of 1%. Its earnings per share (EPS) turned red last year, but it's expected to turn black again in 2023 and grow at a CAGR of 4% through 2025.
Let's assume AT&T's growth stabilizes and investors start to pay a higher forward multiple of 12 and forward price-to-sales ratio of 2 for its stock. AT&T's current market cap would double to $220 billion in this rosier scenario, and it would only need to grow its annual revenue and EPS by 4.5 times to reach a $1 trillion market cap by 2050. But to hit that mark, it would still need to grow its revenue and EPS at a CAGR of 5.8%.
For now, it seems unlikely that AT&T can achieve either growth rate and reach a $1 trillion market cap in 27 years. It could certainly double or even triple your returns, especially if you reinvest its big dividends, but anything more is a bit of a stretch.
What should investors actually pay attention to?
Instead of wondering if AT&T will ever become a trillion-dollar company, investors should focus on its ability to expand its 5G and fiber networks and sharpen its competitive edge against Verizon Communications and T-Mobile US.
AT&T already gained postpaid phone subscribers at a much faster rate than its larger competitor Verizon over the past year, and it offset the sluggish growth of its business wireline segment with the expansion of its consumer-facing fiber networks. It's also been expanding its 5G networks to keep pace with T-Mobile, which uses lower-band spectrums to cover broader regions across America than AT&T and Verizon's higher-band spectrums.
AT&T accelerated those efforts after spinning off DirecTV and WarnerMedia, but those strategies are also consuming a lot of cash. It notably only generated $1 billion in free cash flow (FCF) in the first quarter of 2023 -- which suggests it might miss its goal of generating $16 billion in FCF for the full year -- as it ramped up its 5G and fiber investments.
AT&T insists those expenses "peaked" in the first quarter, but investors should watch its FCF like a hawk throughout the rest of the year to see if its dividend -- which consumed $9.9 billion of its FCF in 2022 -- is in danger of being cut. A reduction of that hefty forward yield of 7.2% would eliminate one of the main reasons to own its stock. AT&T also needs to make more progress toward reducing its high ratio of net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from 3.2 in the first quarter of 2023 toward its target ratio of 2.5 by early 2025.
As for AT&T's revenue growth, its core mobility segment needs to keep gaining new postpaid phone subscribers at a faster clip than Verizon. The expansion of its fiber business should also ideally offset the slower growth of its business wireline division.
It might still be a great blue chip dividend play
If AT&T can stabilize its spending and continue to expand, then it could still be a great long-term income play at these levels. Nevertheless, investors shouldn't expect this telecom giant to become a trillion-dollar stock over the next few decades.
