Despite a rollercoaster year, telecom stocks may finally be a worthwhile investment.
AT&T stock price swings have been significant throughout 2022 for AT&T investors. After third-quarter earnings results were released on Oct. 20, shares shot past $18 after reaching a 52-week high in May.
Given this year’s uncertain macroeconomic environment, the wild ride may not be over yet. Despite this, AT&T continues to deliver outstanding customer growth. AT&T’s strong financial performance makes it a smart investment. A highly competitive market in the U.S. helps the veteran telecom giant capture customers from rivals.
However, there are reasons to wait before pulling the trigger. Let’s evaluate AT&T from a long-term perspective to determine if it makes sense to invest in it.
Let’s Pick Up the Phone
AT&T’s stock market volatility this year is the result of several factors. Media, its biggest entertainment asset, was spun off in April, and the company has cut its dividend by nearly half. While AT&T was abandoning its Hollywood ambitions and reducing its debt, it focused on its core telecom business.
As a result, AT&T’s free cash flow (FCF) forecast for the year was lowered from $16 billion to $14 billion in July. As a result of inflation, the company’s costs increased more than expected, and customer payments were delayed, resulting in a $2 billion hit in Q2. The company was also ramping up its capital investments in fibre optic and 5G networks simultaneously. This put pressure on AT&T’s cash flow.
Because AT&T recently raised prices, which could result in customers fleeing to competitors, we think it is more prudent to wait for Q3 results before investing. Shares may be worth buying now that these results have been released.
The company’s Q3 results were excellent. In the telecom industry’s most valuable customer segment, postpaid mobile phone subscribers, the company has seen consecutive quarterly growth since Q2 of 2020. In that quarter, sales decreased due to the Coronavirus pandemic. Postpaid subscribers at AT&T reached 83.6 million in Q3, the company’s highest number since 2013.
AT&T reported the strongest growth in wireless service revenue in over a decade in Q3, thanks to healthy customer growth. As customers upgraded to 5G-enabled devices, equipment sales increased 7.2% year over year, hitting $4.9 billion, the highest total in years.
There’s more to it than that. In addition to its traditional business lines, AT&T’s Internet-of-Things (IoT) business will provide another opportunity for growth.
The number of IoT devices is expected to grow from 9.7 billion in 2020 to 29 billion by 2030. In Q3, AT&T had more than 100 million IoT connections, the first U.S. telecommunications company to do so. Over 1 million connected cars have been added to the company’s network for the 30th consecutive quarter.
John Stankey became AT&T’s CEO in the summer of 2020, and the company has enjoyed success ever since. The previous leadership of AT&T spent billions acquiring entertainment assets, which led to huge debt. As soon as he took over, he began divesting those assets.
By refocusing and allocating resources differently, AT&T has achieved its current success. This year and next, Verizon will invest $24 billion in expanding its 5G and fibre optic networks. The goal of AT&T is to build a sustainable business that generates a free cash flow flywheel for many years to come, as Stankey stated.
What Did They Say?
As far as FCF is concerned, that’s one aspect of Q4 earnings to watch. To reach its revised target of $14 billion, AT&T must generate $6 billion in free cash flow through the third quarter of 2022.
AT&T reported $5.3 billion in free cash flow in Q4 last year, excluding divested businesses. Although AT&T expects lower capital expenditures in Q4, its stock price could fall if it fails to meet its FCF target.
It is for this reason that further volatility in stock prices is possible. Depending on your risk appetite, you may want to wait until Q4 results are released to buy shares.
Other than that, AT&T is proving to be an excellent long-term investment. AT&T has consistently reduced costs under Stankey, reduced debt, and increased revenue under his leadership. A solid strategy is working for AT&T, as evidenced by these results.
We believe AT&T’s track record shows it is a worthwhile investment. Long-term investors will find AT&T a worthwhile investment due to its attractive dividend yield of approximately 6%.