Next Week Will Be a Game-Changer for AT&T Stock
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.
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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.
HBO Max
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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