Shares of AT&T (NYSE:T) haven’t gone anywhere for a long time. As the telecommunications giant has struggled with cord-cutting and wireless competition headwinds over the past several years, the company’s revenues and profits have struggled to make meaningful upward progress. As a result, T stock has failed to move much higher.
In mid-2012, the AT&T stock price stood at $33. Today, seven years later in mid-2019, shares still trade hands around $33.
Lack of progress on the bottom line has prompted this sideways movement in T stock. Pre-tax profits in the year ended December 2013 were around $28 billion. Last year, they were around $25 billion. Without progress on the bottom line, we’ll likely see further aimless trading.
But three big reasons drive belief that net profits will start making sustainable upward growth in 2019. Moreover, that trajectory should continue over the next several years. Plus, an underappreciated catalyst could spark a huge rally in the AT&T stock price.
Thus, contrarians have four tailwinds to deliver upside in 2019 and 2020, which are as follows:
Wireless Competition Headwind Is Moderation
A ruthless pricing war in the wireless-coverage industry imposed a critical headwind on AT&T stock over the past several years.
Specifically, as wireless coverage has become largely commoditized, multiple wireless-coverage players offered similar plans as the major players; thus, price became the differentiating quality in this space. This has driven wireless prices across the industry lower, naturally weighing on AT&T’s margins.
This headwind should moderate going forward. Specifically, the industry’s two biggest price “under-cutters,” T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S), are set to merge. As these rivals stop competing, the volume of price-slashers across the whole industry should come down. The market will turn rational. That means competitors will emphasize their services’ value and rely less on promotions.
The result will be higher margins for AT&T, and likely a boost for T stock.
The 5G Boom Will Provide a Healthy Tailwind
The second tailwind for margins should be AT&T’s ability to differentiate on the quality front through enhanced 5G coverage.
The next big thing in the wireless coverage industry is the 5G boom. Mainstream rollout of this new coverage paradigm is set to happen throughout 2019 and 2020. Importantly, this rollout will “de-commoditize” wireless coverage: only the top dogs will be able to offer the best 5G coverage. AT&T is one of those top dogs.
As such, AT&T can differentiate itself on quality, giving it more pricing power in the wireless-coverage market. That enhanced pricing power should flow through into bigger margins.
Overall, then, AT&T’s wireless margins should move meaningfully higher over the next several years. That should provide a robust lift to the company’s profits.
The Streaming Pivot Will Offset Cord-Cutting Weakness
The other big headwind which has weighed on AT&T’s profits over the past several years has been cord-cutting. Specifically, everyone and their best friend is switching to streaming. However, this dynamic has disadvantaged AT&T’s linear programming business.
But much like Disney (NYSE:DIS), AT&T is planning to offset this cord-cutting weakness through a full-scale pivot into streaming. With the acquisition of Time Warner, AT&T has amassed a large portfolio of rich and valuable content. It can then package that content into one streaming service, which is reportedly set to launch later this year.
Given the content firepower behind this streaming service, it should launch to exceptional demand. In turn, I expect growth to a sizable subscriber base over the next several years, ultimately helping the bottom line.
AT&T Stock Price Is Too Cheap for Its Own Good
Given the three aforementioned tailwinds, AT&T’s depressed profit base is finally ready to make sustainable moves higher. As it does, AT&T stock should rally immensely.
Why? Because AT&T stock is too cheap for its own good. The equity’s forward-earnings multiple is so low, and the dividend yield so big that the two are nearly equal (nine-times forward earnings, and a 6%-plus dividend yield).
With such a dynamic, AT&T stock is not priced for profit growth: it’s priced for continued profit erosion. As such, if profit growth does come into the picture, shares could benefit massively from the positive surprise.
Bottom Line on T Stock
AT&T stock hasn’t gone anywhere for a long time, mostly because profits also haven’t gone anywhere. But profits should start moving higher in 2019 and continue to make upward progress over the next several years.
As they do, T stock should rally in a meaningful way. Because most likely, shares are about as cheap as they get.
As of this writing, Luke Lango was long T and DIS stock.
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