HBO Max: No Impact On AT&T’s Stock Price?

by Trefis Team
+10.93%
Upside
28.99
Market
32.16
Trefis
T
AT&T
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Despite an 11% rise since the March 23 lows of this year, at the current price of around $30 per share, we believe AT&T’s stock (NYSE: T) has more upside left. AT&T’s stock has increased from $27 to $30 off the recent bottom compared to the S&P which increased 39%. The stock has lagged the broader market because of a low-decibel launch of HBO Max, along with the recent acquisition of Warner Media not expected to add much to the top line in 2020 due to the ongoing pandemic hitting the movie and advertising revenues for media giants.

While AT&T’s stock is still about 10% below the levels seen at the end of 2017 (over two years ago), it has partially reached the level it was at before the drop in February due to the coronavirus outbreak. Despite the recent stock price rise and revenues projected to be lower (y-o-y) in 2020, we feel that the company’s stock still has potential as HBO Max is likely to pick up in the coming months and a gradual easing of lock down is expected to help drive revenues in other segments in the latter half of the year. Our dashboard What Factors Drove -9.6% Change In AT&T Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price decline of the last two years is justified by the 50% decline in AT&T’s profits, as net income margin declined from 18.6% in 2017 to 8.3% in 2019. Sharp drop in 2018 was because margins were unusually high in 2017 due to one-time tax benefits received, but they further went down in 2019 due to large actuarial losses realized during 2019. This was partially offset by 13% revenue growth between 2017 and 2019. On a per share basis, earnings declined from $4.77 in 2017 to $1.90 in 2019.

Despite EPS going down, the company’s P/E multiple has seen a continuous rise from 7x in 2017 to 20x in 2019. This was mainly because the stock price increased as the EPS drop was driven by non-recurring factors, while operating margins have steadily increased during this period. The P/E multiple currently stands at 16x and we believe has an upside when compared to the recent level of 20x at the end of 2019.

What’s The Likely Trigger And Timing For Further Upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Rising unemployment and partial employment has affected consumer spending. Additionally, the lock down in almost all major global cities has affected AT&T’s revenues from Warner media because of less content developed and lower advertising revenue, while the telecom business saw net post-paid additions of 163,000 in Q1 2020 (still lower on y-o-y basis).

Though the highlight of AT&T’s operations was the much-awaited launch of HBO Max on 27th May 2020, the launch failed to create the buzz that was palpable during the launch of Disney+ in November 2019. Also, if we compare the numbers, we find that Disney+ has over 50 million subscribers (in May 2020) and it had around 26.5 million subscribers in less than 2 months of its launch. In comparison, HBO Max had only 1.7 million downloads in the first 20 days since launch. The subdued performance could mainly be because of it being the most expensive streaming option currently. However, we expect HBO Max to pick up in the coming months as streaming demand increases and with it having a rich content library that caters to children as well as adults, something that seems missing in Disney+ (HBO Max has a much wider content for adult audience compared to Disney+).

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

As the actual impact of HBO Max on AT&T’s revenues and earnings becomes clearer only after Q3 2020, and with the company also being a party to the 5G revolution, we believe that the stock price could see an uptick from its current levels. As per AT&T’s valuation, Trefis has a price estimate of $34 per share for AT&T’s stock, higher than its current market price. But wait a minute, despite a positive outlook, AT&T seems to fall behind Verizon in the telecom war.

While AT&T’s stock is likely to rise post Covid-19, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising

 

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