AT&T T is set to report its third quarter results Monday, October 28 before the opening bell. The telecommunications giant has seen its shares rise 29.8% year-to-date, easily outpacing the broader wireless market’s 16.8% run. The wireless network provider is known to have the ability to weather broader market volatility with its beta ratio of 0.63.
Before today, the markets have struggled to gain traction as investors tried to gauge the global economic outlook. Q3 earnings season has been a mixed bag of results that hasn’t provided a definitive answer to the trajectory of domestic economic growth. Let’s take a closer look at AT&T’s HBO Max and how they might come out of the gates for Q3.
AT&T Ups the Streaming Ante
AT&T has been pouring a lot of money into HBO Max, which is operated through its WarnerMedia subsidiary. It’s committed to increasing HBO's original production budget by 50% to about $1.5 billion. It's also creating original content exclusively for HBO Max, and is licensing a lot of programming from itself and other media companies to provide “10,000 hours of premium content." In total, the content on HBO Max will cost WarnerMedia between $2.4 billion and $3.9 billion per year and that doesn't include the extra $500 million it's spending on HBO originals.
WarnerMedia faces a unique problem when it comes to correctly pricing its HBO Max service as its current on demand product, HBO Now, costs $15 per month. WarnerMedia relies heavily on pay-TV distributors for the majority of its HBO subscription revenue, which is why it’s priced HBO Now at $15; analysts believe HBO Max will be priced at the same price. $15 a month would make the service more expensive than Netflix’s NFLX most popular plan, Disney+ DIS, and three times more expensive than Apple TV+ AAPL.
WarnerMedia wants to scale HBO Max to reach 70 million subscribers, but its pricing could prevent that. Price is typically the biggest factor influencing consumers' decisions on which streaming services to subscribe to, potentially making it difficult for HBO Max to reach its forecasted audience.
WarnerMedia's content budget requires a much greater scale than it's likely to achieve anytime soon with its high prices. One way AT&T could help boost subscriptions is through bundling HBO Max with its unlimited wireless data plans. It can go down the similar road that Verizon VZ did with bundling Disney+ subscriptions to its unlimited wireless data customers as well as other valued clients.
The pact could help lead to 8 million Disney+ subscribers within the first few weeks of the promotion, and 18 million by the end of next year. In order for the bundling strategy to work for AT&T, the bundle will have to boost the perceived value of HBO Max and improve subscriber retention for one or both services.
Our Q3 consensus estimates project AT&T to see a 3.33% jump to $0.93 per share while revenue slips 1.66% to $44.98 billion. WarnerMedia revenue is expected to fall a slight 0.84% to $8.14 billion, and the Entertainment Group is expected to bring in $11.1 billion for a 4.11% jump. Looking ahead to the company’s full fiscal year projections, estimates call for a top-line gain of 6.58% to $181.99 billion and for a bottom-line increase of 1.14% to $3.56 per share.
AT&T’s HBO Max and HBO Go are at a disadvantage in the streaming wars, as its services are at a premium to its competitors in a market where price is the dominant determinant of what service consumers choose. The bundling strategy isn’t necessarily a home-run tactic, but if it wants to establish its new service in the saturated space, it may have no other choice.
AT&T boasts a hefty 5.54% dividend yield that has steadily grown over the past five fiscal years. The stock is currently trading about 4.6% under its 52-week high of $38.75 and a strong quarterly report can send it soaring to a new high. Additionally, the stock is currently trading at a discounted forward multiple compared to its industry average, which gives a solid entry point to a stock that has provided slow but steady gains over the past decade. AT&T sits at a Zacks Rank #3 (Hold).
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