Does HBO Max Make AT&T Stock Attractive At $30?

by Trefis Team
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After about a 23% drop in AT&T’s (NYSE: T) stock price since the beginning of 2020, at the current price of $30 per share (as of 24th April 2020), we believe that AT&T’s stock price could see an upside considering the expected launch of its streaming service HBO Max, and the positive impact of the ongoing coronavirus crisis on streaming players. HBO Max is scheduled to be launched on 27th May 2020. The stock is still about 11% lower compared to where it was at the end of 2017, a little over two years ago, whereas it is 21% lower than its closing price at the end of 2019. Our dashboard What Factors Drove -11.3% Change In AT&T Stock Price Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The rise in stock price levels from end of 2017 to end of 2019 is justified by the roughly 13% increase in AT&T’s revenues from 2017 to 2019. The rise in revenue was mainly driven by the acquisition of Time Warner in June 2018. However, higher revenue was completely offset by a 58% decline in net income margin. Margin dropped from 18.3% in 2017 to 7.7% in 2019, which in turn led to a 60% drop in EPS from $4.77/share in 2017 to $1.90/share in 2019. Drop in EPS was slightly higher than the drop in margins, mainly due to 18.5% increase in shares outstanding.

Drop in earnings was more than offset by a 184% rise in the P/E multiple from 7.0x at the end of 2017 to 19.9x at the end of 2019. P/E multiple increased due to a drop in EPS as well as rise in stock price. Despite a drop in EPS, the stock price went up as the sharp decline in margin in 2018 was primarily due to margins being unusually high in 2017 on account of large tax benefits received. Margins declined further in 2019 due to $5 billion of actuarial losses reported and higher debt redemption costs. This signified that sharp drop in profits in 2018 and further decline in 2019 did not reflect a deterioration in the company’s fundamentals, but instead was driven by non-recurring items. Thus, despite a drop in reported EPS, the stock price increased due to the future growth outlook and the company’s increased focus on streaming. However, in 2020, the P/E multiple saw a marginal decline to 15.6x currently due to the coronavirus crisis, but is still 123% higher than the multiple at the end of 2017.

On the contrary, AT&T’s rival T-Mobile has seen its stock rise from 2017 till now, despite COVID-19 crisis.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities across the globe has led to people sitting at home. Home confinement is likely to lead to higher demand for streaming services and home entertainment options. Though lower consumer spending could adversely affect AT&T’s traditional communication revenues (AT&T’s Q1 2020 results confirmed this reality with a drop in revenues on y-o-y basis), the launch of HBO Max – AT&T’s streaming platform – in May 2020 and people confining themselves to their home due to the spread of coronavirus, is likely to prove beneficial for the company. Though a new player like AT&T will have to compete with giants such as Netflix, Amazon, and Disney, we believe that higher demand for streaming could possibly lead to a strong medium-term outlook for the company, despite a dent to its traditional revenue segments. The company has withdrawn its full year guidance due to the lack of visibility related to COVID-19 pandemic and recovery.

If there are signs of containment of the virus by mid-May 2020, the stock could see a healthy upside with it possibly recovering fully to its pre-crisis level of $38. However, in the absence of any visible signs of virus containment by mid-May 2020, the stock price could hover around its current level of $30 in the near term, with the stock price drop being buffered by an expected rise in streaming.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of Coronavirus impact on a diverse set of AT&T’s peers including T-Mobile and Comcast. The complete set of coronavirus impact and timing analyses is available here.


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