There has been plenty of fanfare surrounding the new Walt Disney (NYSE: DIS) streaming service set to launch next month. But while much of the attention is on the services of Disney and Apple (NASDAQ: AAPL), AT&T (NYSE: T) stock could be an under-the-radar streaming winner.
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AT&T is taking the next step in transforming its traditional media business next week when the company holds its HBO Max event on Oct. 29. Between the HBO Max news and AT&T’s earnings the day before, next week is the biggest week of the year for the owners of AT&T stock.
What to Expect From AT&T’s Earnings
Before the HBO Max event, on Monday AT&T will release its third-quarter earnings. Analysts, on average, are calling for earnings per share of 93 cents on revenue of $45 billion. That revenue figure would represent a 1.6% sales decline from the same period last year.
The owners of AT&T stock will be watching the company’s subscriber numbers. It’s been about three years since AT&T broke the bank by buying Time Warner for $85 billion. Unfortunately, since the end of 2016, AT&T’s premium video subscriber count has been steadily declining. Premium video includes both DirecTV and U-Verse video subscribers. Total subscriber count has dropped from 25.3 million in Q4 of 2016 to just 21.6 million in Q2 of 2019.
Last quarter, AT&T reported 778,000 premium video subscriber losses and 168,000 DirecTV subscriber losses. That was even worse than the 627,000 net losses AT&T reported in Q1.
Next week, the owners of T stock will be looking to see if those subscriber losses continued to accelerate in Q3.
In November, AT&T is raising the price of AT&T TV Now by $15 per month to $65. Investors are hoping this price hike will increase T’s average revenue per user without hurting its subscription numbers too badly.
But the biggest event of next week for AT&T stock owners will probably not be its earnings. That’s because, on Tuesday AT&T will hold its long-awaited HBO Max investor event. In fact, this event is so important that it’s likely the reason AT&T postponed its earnings report for one week.
According to various reports and analysts, AT&T will charge between $15 and $17 per month for HBO Max. However, Bank of America analyst David Barden says AT&T may try to out-Netflix (NASDAQ: NFLX) Netflix when it comes to pricing. For years, Netflix lured consumers to its service by charging much less than cable TV.
Barden says AT&T may charge just $10 per month for HBO Max. That price would undercut Netflix’s standard plan, which costs $13 per month. It’s certainly not a crazy price, considering Disney+ will start at just $7 per month.
AT&T could follow Netflix’s model and ignore margins for the first couple of years in favor of attracting more subscribers. Unlike Netflix, AT&T has enough cash flow to absorb those losses.
Barden says the subscription service will initially cost AT&T between $1 billion and $1.5 billion in annual earnings before interest, taxes, depreciation and amortization. However, the telecom giant may have a few tricks up its sleeve to mitigate those losses.
“To help offset some of the drag, we believe AT&T could shut down the AT&T TV Now (formerly DirecTV Now platform) and update synergy expectations from the Time Warner integration (back office benefits from putting together the three silos),” Barden says.
Barden says AT&T will also likely placate the owners of AT&T stock by offsetting the earnings per share drag with buybacks of T stock.
“To help offset some of the cost drag at the EPS line, we believe AT&T will initiate an $8-$10bn stock buyback program,” he says.
Investors will also learn more about HBO Max’s content, potential bundles/promotions and an international roll-out plan.
Plenty to Like About T Stock
AT&T stock has all the elements of a solid long-term investment. The stock’s valuation is appealing, as it’s trading at a forward earnings multiple of 10.5. In a worst-case scenario, that valuation should provide support for T stock.
And T stock pays a large 5.3% dividend yield, while using less than 100% of its free cash flow to pay its dividend. In other words, win lose or draw, long-term investors will get paid well for their patience.
Finally, T stock has plenty of near-term catalysts next week and beyond. Unlike other blue chip dividend stocks, AT&T has a legitimate long-term growth opportunity if its streaming service can gain traction.
Bank of America has a “buy” rating and a $40 price target on T stock. I agree that at this point, AT&T is a solid core holding in any long-term investment portfolio.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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