Nielsen, the market research firm, estimates in a recent report that more than 50% of the mobile phones in the US will be smartphones by the end of 2011. Such a trend would positively impact the stocks of mobile phone operators like AT&T (NYSE:T), Verizon (NYSE:VZ) and Sprint (NYSE:S). We believe there could be a small (3%) upside to our $38 Trefis price estimate for AT&T’s stock if this trend were to materialize.
Below we discuss how rising smartphone penetration can drive up AT&T average revenue per user (ARPU), and how this leads to an upside of up to 3% for our estimate of AT&T’s stock price.
70% of AT&T’s User Base Could Have Smartphones by End of 2011
Nielsen estimates that by end Q3 of 2011, the fraction of mobile users using smartphones in the US will increase rapidly to 49% and will go past 50% by end 2011. This indicates a noticeable change in the growth rate of smartphone penetration. Historically, smartphone penetration has increased at a rate of around 1.8% per quarter since 2008; however, going forward Nielsen expects it to grow at 4% per quarter till 2011.
Based on Nielsen estimates, we believe that US smartphone penetration could reach about 51% to 52% by end of 2011. We also estimate that AT&T’s smartphone penetration is higher then overall US smartphone penetration. This is due to the presence of a large number of iPhone users on the AT&T network as well as due to the low penetration of smartphones on the networks of other US carriers like Sprint and T-Mobile.
Based on Nielsen’s smartphone penetration growth trajectory, we estimate that about 70% of AT&T’s subscribers could be smartphone users by the end of 2011.
Increasing Smartphone Penetration Will Drive Up AT&T’s ARPU
Smartphone users generally pay 70% to 80% more than other mobile phone users. We estimate that AT&T enjoyed an ARPU of more than $66 from its smartphone users in 2009.
Although this figure saw a decline of close to 6% in 2009, we believe that going forward the ARPU decline would be in a lower range of 2-3%, due to the following reasons:
- Improvement in the macroeconomic environment will reduce the number of customers shifting to lower priced plans
- Data usage (internet, SMS) by consumers is expected to grow exponentially. This will result in many smartphone users shifting to unlimited usage plans that are generally priced higher
If Nielsen’s forecasts are accurate and the proportion of smartphone users on AT&T were to increase, then AT&T’s data ARPU can see an upside of about 4% to 5% for 2010 and around 6% to 7% for 2011, resulting in data ARPU of about $31 per month by the end of our forecast period instead of the $28 per month that we currently forecast.
You can modify our forecast below to see how faster growth in data ARPU will impact AT&T’s stock price.
3% Upside Possible If Nielsen’s Forecasts Materialize
Nielsen’s estimates indicate faster adoption of smartphones than we anticipate. If these forecasts were to materialize, we believe that AT&T will benefit by additional revenues of about $15 billion spread across the Trefis forecast period till 2016. This can lead to an upside of about 3% to our $38 Trefis price estimate for AT&T’s stock price.
For additional analysis and forecasts, here is our complete model for AT&T’s stock.
