Saturday, October 14, 2017

AT&T: A Telecom Giant On Flash Sale (Part I)

On October 11, AT&T (stock ticker T) warned on Q3 results, which caused its share price to decline by about 6%. Such a big one day price decline is no less than a correction and could possibly be a great opportunity to buy shares in one of the largest and well known blue chip telecom companies while earning a very juicy 5.5% dividend yield.



T has been a large position in my portfolio and I've been waiting to add more shares upon a correction of some sort. I had to take advantage of this 6% correction and bought some more shares of T. This recent purchase now makes T officially one of my largest positions in the dividend portfolio.

This is a two part article:

In Part I, I'm going to look at the reasons for this correction and also why I think the future growth opportunities surpasses any short-term risks or secular declines in one of AT&T's products.

In Part II, I will go over the stock fundamentals and valuation to make a case that the stock is currently trading below fair value while paying a substantial large dividend for a high quality dividend aristocrat.


Two Reasons For The Recent Decline

1. Impact to U.S. and Mexico operations due to hurricanes and earthquake.
2. AT&T forecasts U.S. video subscriptions down by about 90,000.


The first reason is short-term and should not be a cause of concern for long-term investors. However, the second issue of lower video subscriptions is the major reason why T shares declined by 6% in one day, so let's explore it further.

If you are already invested in AT&T or use their video service, you probably know that AT&T is more than just a phone company. A few years back, the company bought DirectTV, which is one of the largest satellite video providers in the U.S. The whole idea behind the acquisition was to diversify company's revenue into more lucrative video subscriber and into content provider space rather being stuck as a telecom company.

However, there is a growing trend of U.S. video subs (subscribers) cord cutting and moving to OTT (Over-the-Top) service. OTT is a term used to describe broadcasting of audio and video over internet such as through your mobile phone, tablet, or a PC. This means declining revenues for AT&T's DirectTv satellite service.

Fortunately, AT&T also has an OTT service called DirectTv Now which is trying to offset the loss to its traditional satellite service and was the reason why the total or net loss of video subscribers was only 90,0000 and not worse. So that's the good news.

The bad news is DirectTV Now has much lower margins than the traditional cable/satellite DirectTv product and due to heavy promotions, AT&T may even be losing $1 per subscriber as the cost of this service to the company is higher than the what the company is earning per subscriber.

Now, it is expected that once the DirectTV Now promotions end, the margins would get better and the service will become profitable, though it may still never get to the lucrative margins that the traditional service enjoyed.

To summarize the concern, the company is not getting the expected benefit of the DirectTV merger and the main reason why the stock took a dive last week.

Two Reasons To Be Bullish

I see the following two reasons or catalysts to be bullish on the T stock in long-term:

1. Acquisition of Time-Warner (TWX)

AT&T is working on acquiring world's largest film and TV studio Time-Warner. It is the company that owns major brands like HBO, Warner Brothers, CNN, TMZ, TBS. among many others.

Source: Time Warner Acquisition Presentation, page 6



The deal will transform AT&T into one of the largest media and entertainment companies in the world while providing premium content through its wireless subscribers using DirectTv Now service. This is why I think the DirectTv Now margins should improve after the acquisition of TWX.

Time Warner shareholders have already Okay'ed AT&T buyout and the acquisition is going through various regulatory approvals.

2. Growth in 5G Technology

The second catalyst is the introduction of the next generation of wireless connectivity Technology 5G. In theory, it could allow our smartphones to have up to 1000 times faster download speeds than the average 4G connection. This means instant connectivity with virtually zero latency.

The companies that own most of the 5G Spectrum will rule the future highways of information

5G: Entertainment

This means, users will be able to watch stunning 4K (about four-times the resolution of HD TV) videos on their smart phones or tablets while using multi-casting. At speeds of 20Gbps, it would take only 10 seconds to download a 4K UltraHD movie.

5G: Autonomous Cars

Autonomous cars will use 5G connectivity to communicate with everything around them. This is called V2X or Vehicle-to-Everything where Everything includes Vehicle-to-Vehicle (V2V), Vehicle-to-Infrastructure (V2I), Vehicle-to-Network (V2N), and Vehicle-to-Pedestrian (V2P).

In short, 5G will provide near zero latency for such communications which is critical in avoiding a crash and dramatically improving vehicle safety and reduce congestion.

Source: Qualcomm










5G IOT: Merging Humans and Machines (The Singularity)

The biggest 5G impact would be in the Internet-of-Things (IOT). Imagine thousands and thousands of sensors all around us communicating at super high speeds with each other and with our cars, devices such as smart phones, smart glasses, or VR googles, providing us instantaneous information about our surroundings and guiding us in finding where we want to go or what we are looking for, all seamlessly.

5G is the next big step towards reaching the notion of Singularity when humans and machines become one. Here are the words of Softbank founder, chairman and CEO Masayoshi Son, who warns of the coming singularity at MMC17:


Source: GSMA
If you don't know who Masayoshi Son is, think of him as the Steve Jobs of Japan. His company Softbank owns ARM Holdings (the designer of ARM processors used in almost every smart phone, smart watches, and gadgets in the world). ARM is the dominant player in mobile processors and even beat Intel in the game. Apple, Samsung, Qualcomm, MediaTek, they all use processors based on designs licensed from ARM Holdings.

AT&T is working with 5G technology partners such as Qualcomm, Ericsson, and Intel on 5G trials while increasing its 5G Spectrum ownership:

Source: http://www.microwavejournal.com/articles/27662-qualcomm-ericsson-and-att-to-collaborate-on-5g-trials

Source: http://www.zdnet.com/article/at-t-expands-5g-trials-to-three-more-cities/

Source: https://9to5mac.com/2017/04/10/att-straight-path-spectrum-holdings/
Straight Path Communications is one of the largest owners of 28Ghz and 39Ghz millimeter wave spectrum used by carriers and covers the entire United States. In AT&T owns words:

The acquisition will support AT&T’s leadership in 5G, which will accelerate the delivery of new experiences for consumers and businesses like virtual and augmented reality, telemedicine, autonomous cars, smart cities and more.

Think about owning 5G spectrum as owning fastest super highways for wireless data communication. Whichever wireless company (AT&T, Verizon, Sprint, etc.) owns the most of these super highways, would be at advantage of offering the fastest network speeds to their customers and lure in new subscribers.

Summary

Despite the short-term setbacks due to natural disasters and downward trend in legacy cable/satellite business, the Time-Warner acquisition and 5G growth are the two main and very positive catalysts that will drive growth of AT&T for years to come and away from its legacy business. This is why, I believe AT&T is a great long-term investment with excellent dividend and future growth prospects.

Thank you for reading and as always, I appreciate your feedback in the form of comments. Also, stay tuned for Part II where I would go over the AT&T's stock valuation and why I think stock is currently trading at below fair value and a great bargain for both growth and income investment.

Disclosure: I am long T.

Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer

2 comments:

  1. Mr. ATM. Thanks for the review. I noticed the large one day drop, but did not have the chance yet to investigate. T is also one of my larger personal holdings. I appreciate your deep dive into their business and look forward to your valuation analysis. Tom

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    1. Thanks Tom, appreciate it. Yes, I will try to get the Part II out later today.

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