AT&T’s (T) Secret Weapon: Why The Street Is Missing The Convergence Story
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AT&T (T) continues its relentless march into America’s fiber future. Despite worker strikes and Mother Nature’s fury, AT&T added 226,000 fiber customers in Q3, marking its 19th straight quarter of 200,000+ net adds. Yet, Wall Street liked what it heard, as the stock reversed early losses to close higher on the day. Underneath those numbers lies a story that few seem to understand – AT&T isn’t just building a fiber network; they’re creating an unprecedented converged empire. And our TrackStar data shows professional investors are taking notice, with AT&T dominating institutional search volume among telecom stocks last quarter. Here’s why this matters more than most realize. AT&T’s Business AT&T has transformed itself from a legacy telecom provider into America’s largest fiber operator and a 5G powerhouse. With over 28.3 million fiber locations passed and 143,630 employees, AT&T serves millions of consumers and businesses across the country through its wireless and broadband networks. |
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The company segments its business into the following areas:
AT&T’s latest quarter showed mixed results as the company deals with ongoing transformation. While mobility service revenues grew 4%, overall revenues declined slightly to $30.2 billion, primarily due to weakness in business wireline and lower equipment sales. The company took a $4.4 billion non-cash goodwill impairment charge related to its business wireline unit, reflecting the accelerating decline of legacy services. However, AT&T’s strategic initiatives in 5G and fiber continue to gain traction. The company is aggressively expanding its fiber footprint while exploring innovative partnerships through its GigaPower joint venture with BlackRock and agreements with commercial open-access providers. Most importantly, AT&T is seeing strong evidence that its convergence strategy – selling both wireless and fiber services to customers – is working. The company reports that fiber households are 40% more likely to also have AT&T wireless service, with wireless market share about 500 basis points higher in fiber markets. Financials
Source: Stock Analysis AT&T continues to generate substantial cash flow while managing a heavy debt load. The company produced $10.2 billion in operating cash flow and $5.1 billion in free cash flow during Q3, though both metrics declined slightly year-over-year. Year-to-date free cash flow of $12.8 billion shows significant improvement over 2023, up $2.4 billion. This has allowed AT&T to invest in growth, pay a 5% dividend yield, and reduce debt, with net debt declining by $2.9 billion year-over-year to $125.8 billion. Capital expenditures reached $5.3 billion in Q3 2024, up from $4.6 billion last year, as AT&T continues to invest in 5G and fiber infrastructure. Margins remain solid, with mobility EBITDA margin expanding to 45.1% and consumer wireline EBITDA margin reaching 32.8%. However, business wireline continues to struggle with declining legacy revenues, posting negative operating income for the first time in recent history. Valuation
Source: Seeking Alpha AT&T trades at 9.9x forward earnings (non-GAAP), slightly higher than Verizon (VZ) at 9.0x but well below T-Mobile (TMUS) at 23.7x and BCE (BCE) at 15.2x. This suggests the market views AT&T and Verizon similarly despite AT&T’s stronger fiber growth prospects. Meanwhile, AT&T’s price-to-cash flow of 4.1x sits below Verizon’s 5.0x and T-Mobile’s 12.2x, highlighting its strong cash generation relative to peers. These metrics suggest AT&T remains conservatively valued, particularly given its fiber leadership position and improving operational performance. Growth
Source: Seeking Alpha AT&T’s recent performance presents a mixed picture against its peers. Revenue growth of 0.3% year-over-year modestly outpaces Verizon’s 0.1% but falls short of T-Mobile’s more robust 2.1% expansion. The company has shown impressive momentum in EBITDA, growing 5.3% year-over-year – significantly ahead of Verizon’s 1.5% though still trailing T-Mobile’s 8.4%. Looking forward, AT&T’s projected EBITDA growth of 3.5% suggests continued momentum, particularly compared to Verizon’s more modest 1.5% outlook. Profitability
Source: Seeking Alpha AT&T’s profitability metrics demonstrate its competitive position within the industry. The company maintains a healthy gross margin of 59.9%, virtually matching Verizon’s 60.1% while running slightly behind T-Mobile’s 63.8%. Its EBITDA margin of 35.3% sits comfortably between Verizon’s 36.3% and T-Mobile’s 38.1%, while its EBIT margin of 21.4% aligns closely with T-Mobile’s 21.7% and approaches Verizon’s 23.0%. Where AT&T truly distinguishes itself is cash generation. The company’s levered free cash flow margin of 15.2% substantially outperforms both Verizon at 5.1% and T-Mobile at 10.5%. This advantage extends to absolute cash generation, with AT&T producing operating cash flow of $38.3 billion – surpassing both Verizon’s $35.2 billion and T-Mobile’s $21.6 billion. Our Opinion 8/10 Our 8/10 rating reflects strong execution in strategic growth areas balanced against ongoing business wireline challenges and elevated debt levels. With fiber penetration still only around 40% and a significant runway for converged services growth, AT&T appears well-positioned for continued success. |
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