AT&T (NYSE:T) continues to face strong pressures on multiple fronts and the company’s longer term outlook appears to be particularly negative. As a result, I recommend that investors sell T stock into its recent strength.
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Although AT&T reported better-than-expected first-quarter results on April 22, driven by the strength of its mobility business, the latter unit will likely face sizeable margin pressures and/or market share losses as inflation heats up. Also likely to drag down the telecom company’s shares over time are its large debt and accelerated cord-cutting. Finally, in the long-term, the company’s broadbands unit could be hit with tough competition from Elon Musk’s Starlink service.
Mobility Margin Pressures
In the wake of AT&T’s Q1 results, research firm MoffettNathanson stated that the company was able to continue offering attractive discounts to its wireless customers. But in the face of rising inflation, the company will likely have the uncomfortable choice of curtailing those discounts, potentially leading to major market share losses, or causing its wireless profit margins to fall meaningfully.
Further, the unit may have gotten a boost from the novel-coronavirus pandemic as many consumers likely spent less money on experiences and more on computer hardware, including cell phones and tablets. That trend, of course, is expected to fade going forward as the economy reopens.
Debt, Cord Cutting and Ad Revenue
As of the end of the first quarter, AT&T had a huge debt load of $169 billion., and its net debt was equal to 3.1 times its EBITDA, excluding certain items. There are some indications that the company could have trouble paying off its debt going forward. And if AT&T has to cut its dividend (the shares have a gigantic forward dividend yield of 6.6%) in order to pay down its debt, T stock is likely to dive sharply.
Cord-cutting continues to be problematic for AT&T, as its premium video subscribers tumbled by 3 million last year and 620,000 last quarter. And according to S&P, in-line with previous predictions I’ve made, cord-cutting is expected to generally accelerate going forward.
The revenue of the company’s Warner Media unit jumped 9.8% YOY as its ad sales jumped 18.5% YOY amid the economic reopening trend.
Although the reopening will continue to boost ad revenue in the near-term and medium-term, I believe that, over the longer run, inflation may cause the company’s ad revenue to fall meaningfully. Specifically, as companies’ profit margins drop due to higher input costs, many of them may react by cutting their ad budgets.
Potential Competition From Starlink
For many years, I have believed that tech companies could disrupt the somewhat antiquated broadband internet services offered by the cable and telecom companies. So far, this hasn’t happened yet, but now Elon Musk, the man who revolutionized automobiles, is entering the sector.
The Starlink satellite internet service, provided by Musk’s SpaceX company, has gotten off the ground (no pun intended). Although Starlink is only offering internet service in limited areas at this point, by the end of this year, it’s expected to be available in most of the world, although it’s only seeking to serve 5 million U.S. households at this point.
Still, as technology and Starlink’s innovations advance, I think that the service’s capacity will surge and its price will decrease. Since AT&T Fiber added a net total of 235,000 consumer subscribers last quarter, competition from Starlink would likely cause a serious problem for AT&T and T stock.
The Bottom Line on T Stock
AT&T faces an array of threats, including margin pressures, cord-cutting, inflation, and a huge debt load. Moreover, the company only expects its revenue to inch up 1% this year.
Given these points, investors should sell T stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
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