Why AT&T’s Stock Has Been Underperforming

by Trefis Team
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AT&T’s (NYSE:T) stock has been underperforming somewhat over the last year, with the stock declining from as much as $41 in 2017 to levels of around $32 currently on account of a mixed performance in the wireless business, headwinds in the U.S. pay-TV market and regulatory uncertainty surrounding its planned acquisition of media behemoth Time Warner.  In this note, we take a look at some of the factors impacting AT&T and what’s driving our price estimate for the company.

We have created an interactive dashboard analysis which outlines our expectations for AT&T over 2018. You can modify key drivers to arrive at your own forecasts for the company’s revenues and EPS.

Mixed Performance In The Wireless Space

AT&T’s wireless business has been posting mixed results. During Q1 2018, the company lost about 22k postpaid wireless phone customers. While this was well below the 348k losses in the year-ago period, it marks a reversal from the 329k net subscriber additions the company posted over the 2017 holiday quarter. Growth could remain sluggish going forward as well, due to increasing saturation in the wireless industry. Moreover, the planned merger between Sprint and T-Mobile could alter the U.S. wireless landscape, creating a larger and potentially stronger carrier that could challenge AT&T and Verizon. The merger is likely to result in significant cost synergies, and it’s possible that the merged entity will play the pricing card to retain and grow its user base, which could impact AT&T and Verizon.

Pay TV Business Seeing Headwinds Due To Cord Cutting

AT&T’s pay TV business has also been underperforming significantly, as customers increasingly drop its services in favor of cheaper over-the-top streaming services. The trend of cord cutting appears to be accelerating in the U.S., with the Leichtman Research Group indicating that the U.S. pay-TV market as a whole lost about 1.5 million net video subscribers in 2017, almost double the losses seen in 2016. AT&T for its part lost 554k satellite customers, which are more lucrative compared to the DirecTV Now streaming TV subscribers that it is adding. This could be weighing on the stock, as the company closed its acquisition of DirecTV just over two years ago with a goal of bolstering its pay TV subscriber base.

Uncertainty Relating To Time Warner Deal

AT&T’s planned merger with media behemoth Time Warner is also facing regulatory opposition from the U.S. Department of Justice, which sued the company last November to block the $85 billion takeover. The DoJ has asked AT&T to divest DirecTV or Turner networks, arguing that AT&T could use Time Warner’s content to increase prices. Time Warner’s stock has also been trading at around $93 per share, which is well below the deal price of $107.50 per share, indicating that investors view the antitrust concerns as significant.

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