There's a disconnect between AT&T (T 1.02%) the stock and AT&T the company. While investors have punished the telecom stock over the past few years, sending shares down about 30% since the start of 2021, the company itself has been doing just fine. Mostly free from its failed adventure in the media industry, AT&T is now focused on its wireless and fiber internet businesses.
Winning subscribers left and right
While AT&T's pace of subscriber wins fluctuates quarter to quarter and has slowed down as the state of the economy has taken a toll on consumers, zooming out and looking at the past two years paints a clear picture. The total number of subscribers and connections on AT&T's wireless network has risen by 20% between September 2021 and September 2023 to about 236 million.
The number of postpaid subscribers has jumped 7.6% in that time to 86.4 million, while the number of connected devices has soared 35% to 122.7 million. The prepaid subscriber count has grown slightly, as has the reseller subscriber count.
A rock-bottom churn rate of 0.79% for postpaid phones is one reason why AT&T has been able to keep growing its subscriber count. Customers are sticking around, creating fewer defections that must be offset each quarter.
AT&T is also growing its broadband internet subscriber count. While legacy broadband services are in decline, the company is investing heavily in growing its fiber internet footprint. AT&T managed a slight increase in total broadband subscribers in the third quarter of 2023, with 296,000 fiber net adds more than offsetting a decline in legacy broadband subscribers. Since fiber internet service brings in more revenue per user than legacy broadband, total broadband revenue is now steadily rising.
A pessimistic valuation
AT&T is sensitive to economic conditions, and there's plenty of uncertainty on that front going into 2024. Even so, the extreme pessimism being lavished on AT&T stock is tough to understand. Shares of AT&T rebounded over the past six months but are still down since the start of 2023.
AT&T expects to generate $16.5 billion in free cash flow for 2023. Free cash flow should rise in 2024, driven by continued subscriber gains and a cooling in capital intensity. At the current market capitalization of about $123 billion, AT&T stock trades for just 7.5x free cash flow.
The question investors must ask: Is AT&T a value stock or a value trap?
Some stocks trading at beaten-down valuations do so for a reason. A single-digit price-to-free-cash-flow ratio when free cash flow is in perpetual decline is a very different situation, compared to when free cash flow is expected to rise over time.
While AT&T does face risks -- most notably its debt-heavy balance sheet -- I think the company falls squarely into the "value stock" category. There are certainly things that could go wrong.
If the U.S. economy takes a turn for the worse in 2024, subscriber gains could dry up and existing subscribers could start to trade down to cheaper plans. But on balance, the risks don't justify such a pessimistic valuation.
The best investors can hope for from AT&T is slow revenue growth and somewhat faster free-cash-flow growth. Given the valuation, any growth at all would exceed the expectations baked into the stock price. If AT&T can prove to investors in 2024 and beyond that it can consistently grow subscribers, revenue, and free cash flow, the market could finally award the stock a loftier valuation.
