Here’s Why AT&T’s Stock Could See 15% Appreciation

by Trefis Team
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AT&T stock (NYSE: T) increased around 12% since late March lows (vs. about 45% for S&P 500) to its current level of $30. This is after falling to a low of $27 on 23rd March, as a rapid increase in the number of Covid-19 cases spooked investors, and heightened concerns of an imminent global economic downturn. With the stock currently about 22% below its February 2020 high of $38, are the gains warranted or are investors getting ahead of themselves or being too conservative? We believe that the stock price increase is justified considering the gradual lifting of lockdowns and the launch of HBO Max. In fact, AT&T’s stock still has potential to rise another 10%-15% from its current level. Our conclusion is based on our detailed comparison of AT&T’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did AT&T Fare During 2008 Slowdown?

We see AT&T’s stock declined from levels of around $42 in October 2007 (the pre-crisis peak) to roughly $23 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 45% of its value from its approximate pre-crisis peak. This marked a drop that was slightly smaller than the broader S&P, which fell by about 51%.

However, AT&T’s stock recovered post the 2008 crisis to about $29 in early 2010 – rising by about 24% between March 2009 and January 2010, as against the S&P which bounced back by 48% over the same period.

In comparison, during the current crisis, AT&T’s stock lost 30% of its value between 19th February and 23rd March 2020, and has already recovered 12% since then. The S&P in comparison fell by about 34% and rebounded by over 45%.

Can We Expect Further Gains?

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 a y-o-y basis). The recently announced Q2 2020 results reflected greater impact of the crisis as total revenues fell to $41 billion, compared to $45 billion in Q2 2019, with Warner Media revenues plunging 23% on y-o-y basis due to absence of theatrical releases and lower games and other revenues.

However, 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. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped 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 now mainly focusing their attention on 2021 results.

Though the recently launched streaming service HBO Max failed to generate the kind of buzz that Disney+ managed a couple of months back, 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 consumers of all age groups. As lockdowns are lifted gradually, we believe theatrical releases could resume Q4 2020 onward, which could drive growth in content and advertising revenue. In addition to increased streaming demand and expectations of traditional businesses to get back on track in the next 1-2 quarters, AT&T is also a party to the 5G revolution, which is considered to be the next big thing for the telecom industry. A combination of these factors is expected to be reflected in revenue and earnings growth in 2021, and with the investors now focused on 2021 numbers, AT&T’s P/E multiple is likely to rise from the current 16x to close to 20x. 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, thus providing investors an opportunity to see a potential increase of 15% in their wealth.

While AT&T’s stock is likely to rise from here, see how AT&T stands in comparison to Verizon.


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