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Investment Overview for AT&T (NYSE:T)
Below are key drivers of AT&T's value that present opportunities for upside or downside to the current Trefis price estimate for AT&T.
Mobile Plans & Phones
U.S. Mobile Phones in Use: We estimate that this figure will increase from about 308 million in 2014 to around 340 million by the end of our forecast period as the U.S. mobile industry gets saturated and growth slows down. However, if the growth rate remains high and the figure reaches 400 million, there could be an upside of about 5% to our price estimate.
SMS & Internet Revenue Per Subscriber: We estimate that this figure will increase from over $24 in 2014 to about $31 by the end of our forecast period as more people upgrade to smartphones and subscribe to higher priced plans for more data usage. However, there could be a downside of around 3% to our price estimate if this figure remains flat through our forecast period. This could happen if the proportion of low data ARPU connected devices increases so much that it offsets the higher ARPU smartphone customer gains. On the other hand, there could be an upside of the same magnitude if this figure hits $35 by end of our forecast period.
Mobile CapEx as % of Mobile EBITDA: We expect this figure to decline from around 38% in 2014 to about 35% by the end of our forecast period. However, there could be a downside of over 5% to our price estimate if AT&T's mobile capital expenses as a percentage of mobile EBITDA remain flat at 2014 levels by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for AT&T at the top of the page.
AT&T makes money primarily through mobile phone subscription plans for consumers and businesses. The company also provides landline phone service to residences, small businesses, and large enterprises. Broadband Internet service represents a growth area for AT&T. AT&T acquired satellite TV provider DirecTV in mid-2014, making it the largest pay-TV company in the United States.
The Mobile Plans & Phones division constitutes the majority of AT&T's value for these two reasons:
High AT&T Share in a Large Mobile Phone Market
We estimate that AT&T had a 34% market share in 2014 out of a total of about 344 million wireless connections in the U.S., implying around 120 million wireless connections subscribed on AT&T. We expect AT&T's market share to increase in future and the number of US wireless connections to grow to about 385 million by the end of the forecast period.
In comparison, the number of AT&T home landline connections are likely to decline from about 14 million in 2013 to an estimated 7 million by the end of the forecast period. Similarly, the number of AT&T business landlines are expected to decline from about 13 million to 8 million, by our estimates.
Mobile Phone Voice Plan Pricing Declines Offset by Data
Mobile voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and coverage area have improved. Increasingly, data is a significant part of usage. So, while average voice revenues have been on a downward trend, increased data revenue contribution has helped in mitigating the impact on total ARPU.
Push for Faster Networks
Mobile operators started pushing for 4G networks a couple of years ago and carriers such as AT&T and Verizon have rapidly expanded their LTE networks, with Sprint and T-Mobile also jumping on the bandwagon. With 4G increasingly replacing 3G in majority of the country in the postpaid market, carriers are looking to add capacity to their networks in a bid to provide even faster speeds to users for data browsing and Internet usage. AT&T's acquisition of Leap Wireless last year provided the carrier with some high-frequency spectrum bands which should enable it to boost its LTE data capacity in high-traffic urban regions and thwart rising postpaid competition from carriers such as Verizon and T-Mobile.
Wireless Spectrum Needs
The wireless market is intensely competitive, with the number of wireless subscriber connections (344 million) exceeding the total population (319 million) in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. AT&T's spectrum-driven acquisitions over the last couple of years, including Leap Wireless in 2014, have put the carrier in a better position than rivals in this regard and should suffice for network enhancement for the next two-three years.
SMS Usage on a Decline
SMS texting rates and usage are declining in the U.S., similar to the trend in other parts of the world. The decline in SMS usage can be attributed to the growing use of smartphones that has caused customers to migrate from traditional modes of communication such as text-messaging or SMS to the more convenient and new age messaging services of social media (WhatsApp, Instagram, Facebook & Twitter), email and other IP-based messaging systems. The erosion in SMS usage may have a negative impact on most wireless carriers' data ARPUs as carriers generally charge much more per byte of SMS data sent than any other data sent over the Internet.
Declining Phone Lines per Household
The number of phone lines per household is expected to continue to decline in line with trends in recent years, as many consumers eliminate secondary lines and mobile phones become the primary phones for many consumers. Improvements in the reliability and connection quality of cell phones will have a significant impact on residential phone lines.
Acqusition of DirecTV Makes AT&T The Largest Pay TV Player
AT&T closed its acquisition of satellite television provider DirecTV in July 2014. The deal should enable AT&T to become a key player in the content distribution space, across various platforms including mobile, broadband and TV. AT&T will also gain rights to content such as the NFL Sunday Ticket, which is one of the hallmarks of DirecTV’s offerings. The merged company will be able to offer a “quadruple-play” bundle that includes four bundled services - mobile and fixed-line phone service, high-speed Internet and satellite TV.
Trefis Forecast Rationale for Advtg. & Publishing EBITDA Margin
EBITDA margin represents EBITDA as a percentage of revenue. EBITDA is determined as revenue minus the cost of goods and services sold as well as the cost of sales and marketing.
The historical EBITDA margins have come down from about 48% in 2007 to about 31% in 2010. We expect this trend to continue as this business declines, but at a slower pace.
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How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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