VALUATION HIGHLIGHTS

1. Communication constitutes 69% of the Trefis price estimate for AT&T's stock.
2. Time Warner constitutes 26% of the Trefis price estimate for AT&T's stock.

WHAT HAS CHANGED?

Latest Earnings Update

AT&T announced its Q2 2020 financial results on July 23, 2020. The company missed analysts' expectations on revenue. Total revenue in the quarter was $41 billion, short of Wall Street estimates of $41.1 billion. The COVID-19 pandemic impacted revenues across all segments. Declines at WarnerMedia included lower content and advertising revenues partly due to COVID-19. Revenues also declined in domestic video and legacy wireline services, and Latin America was impacted by foreign exchange pressure. AT&T’s WarnerMedia division — which includes HBO and Turner broadcast networks in addition to Warner Bros. theatrical releases — was heavily impacted by the coronavirus pandemic. Adjusted EPS was $0.83 per share, as against an expectation of $0.79 per share.

HBO Max launched in May 2020

AT&T's streaming offering HBO Max was launched on May 27, 2020. The new direct-to-consumer streaming service promises all of HBO, plus original content, and a library of movies, classic TV and film, fan favorites, and more.

AT&T Outlines 3 year plan

AT&T laid out a 3-year plan that calls for 1% to 2% revenue growth a year with improving margins due to cost reductions. The company plans to grow earnings and EBITDA each year with free cash flow accelerating over the plan. In addition, AT&T also mentioned that it would review its portfolio and divest non-strategic assets. It also wouldn't make any major acquisitions. The company also plans to pay down its debt, buy back shares and maintain its dividend payments. For 2020, AT&T said it expects adjusted earnings to be $3.60 to $3.70 a share and improve to $4.50 to $4.80 in 2022. The earnings include investments in HBO Max.

AT&T is taking an early lead in the 5G rollout

AT&T launched its 5G services in 12 cities in December 2018, while steadily expanding its coverage through 2019. The carrier's total 5G cities stand at over 20, ahead of other U.S. carriers. That said, the service is still in its early stages with limited handset availability and access being limited to business customers only. The company says that it is on track to provide nationwide, mobile 5G by the first half of 2020.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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.

• Postpaid Wireless ARPU: AT&T's postpaid wireless business remains one of its most valuable segments, accounting for a bulk of the value of its communications business. The monthly ARPUs for the segment stood at about $49 in 2018 and we expect the number to grow to about $52 by the end of our review period. However, if the metric increases to about $60 by the end of our review period, it could increase our price estimate by over 5%.

• Warner Bros. Revenues: We estimate that Warner Bros. revenues will grow from around $16.5 billion in 2019 to about 20 billion by 2025. However, if the business outperforms, on the back of stronger box-office revenues and licensing fees, rising to about $24 billion, there could be an upside of about 5% to our price estimate.

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.

BUSINESS SUMMARY

AT&T is a leading provider of telecommunications and media services. The company derives a bulk of its revenues from its Communications business, which includes its wireless phone business, broadband and pay TV operations. In June 2018, the company closed a deal to acquire media behemoth Time Warner, giving the company greater control over content creation as well as distribution. Our model does not include historical figures for Time Warner prior to the closing date.

SOURCES OF VALUE

AT&T's Communications services units account for a majority of AT&T's value for these two reasons:

AT&T's large share of the U.S. wireless phone market

As of December 31, 2018, AT&T served over 150 million wireless subscribers, including both wholesale and retail phones and connected devices. Mobility services account for close to 40% of AT&T's revenues.

KEY TRENDS

Carriers have essentially become mobile data providers

Mobile data usage has skyrocketed in the last few years due to the increasing proliferation of smartphones and related applications and services. According to Cisco, North American mobile traffic per user will reach over 8 GB per month by the year 2020, up from roughly 1.8 GB per month in 2015, translating into a CAGR of 37%. Voice usage, on the other hand, is trending lower. Carriers have also been tailoring their plans based on the monthly amount of data offered, while typically offering free unlimited voice and text.

Saturating wireless market

The U.S. wireless market is saturating, with the total number of wireless connections standing at over 355 million and the number of wireless phone subscribers standing at over 315 million, roughly in line with the U.S. population of 319 million. It's likely that growth in the number of wireless phone connections - which represents the most lucrative segment of the wireless market - will slow significantly going forward. Carriers are likely to focus on retaining existing customers and winning over porting customers while driving an incremental upside from areas such as connected devices and tablets, M2M connections and wholesale services to drive growth in service revenues. AT&T for its part has been focusing on postpaid smartphone customers as well as prepaid customers while reducing its emphasis on postpaid feature phone users, who often have ARPUs lower than its prepaid ARPU. The carrier is also the largest player in the M2M and connected auto space in the U.S.

AT&T's content ambitions

In June 2018, AT&T acquired Time Warner in a stock and cash deal valued at $85.4 billion, integrating its vast distribution network, which spans wireless and broadband services and pay TV, with Time Warner’s media assets, which include the major cable networks CNN and HBO and Warner Bros Studios. With the deal, AT&T owns a significant amount of high-quality original content, besides gaining some bargaining leverage in acquiring content from other companies for distribution.

AT&T may play a larger role in advertising market

AT&T could play a much bigger role in the advertising space after closing its merger with media behemoth Time Warner. With the deal, the company could be in a relatively unique position in the advertising space, considering its massive ad inventory from its TV channels, its large customer data sets from over 170 million customer relationships, and control over distribution channels that span pay TV, broadband and wireless.

Acquisition of DirecTV makes AT&T the largest Pay TV player

AT&T closed its acquisition of satellite television provider DirecTV in July 2015. 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 mobile and fixed-line phone service, high-speed Internet and satellite TV.