5G Is Here. AT&T, Verizon, and T-Mobile Need to Prove Its Value to Investors

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A who’s who of the media and telecommunications world gathered this past week at Goldman Sachs’ annual Communacopia conference, held virtually for the second-straight year.

Most executives described their companies as being in a period of transition toward new business models or technologies. On the media side, the focus remains on direct-to-consumer streaming. Telecom players, meanwhile, are deploying fifth-generation, or 5G, wireless networks and expanding their wired fiberoptic footprints, moving on from 4G and copper.

The major wireless CEOs doubled down on their unofficial corporate credos:

Verizon Communications (ticker: VZ) as the network nerds,

AT&T (T) as the number crunchers, and

T-Mobile US (TMUS) as the scrappy upstart.

“Our strategy is the network,” Verizon CEO Hans Vestberg said on Tuesday. “We wake up every morning, and we think about how we can do it better for our customers.”

He pointed to “five vectors” of growth in the 5G era—including pushing customers to higher-priced plans, new products like fixed-wireless access broadband and mobile-edge computing, and further monetization of its 5G network via wholesale agreements.

Verizon has previously issued a long-term target of 4% annual revenue growth in the coming years, which would follow a generally flat sales performance over the past half-decade. It appears to be a show-me story for investors: Verizon stock has lost 2.5%, after dividends, since unveiling that guidance at a March investor day, while the

S&P 500
index has returned 15%.

AT&T’s John Stankey took investors through his investment thesis on the company’s stock, calling it undervalued based on the sum of the parts, which include AT&T’s telecom business—both wired and wireless—and the soon-to-be spun off WarnerMedia. The latter will be merged with

Discovery (DISCA) to create a pure-play media company focused on global streaming opportunities and anchored by HBO Max and Discovery+.

Stankey says the market is currently valuing AT&T’s media business akin to a “cable network asset,” presumably referring to

ViacomCBS (VIAC) and Discovery, whose stocks trade for less than 10 times forward earnings. That compares with 36 and 47 times, respectively, for shares of

Walt Disney (DIS) and

Netflix (NFLX), which have been rewarded for their scale and rapid growth in streaming.

“My belief is that as we get through this, we should see that [valuation] multiple start to recognize the fact that there is a great direct-to-consumer business that should be valued in the same way the market is valuing other great direct-to-consumer businesses,” Stankey said this past week.

Stankey and AT&T could be waiting a bit for that higher valuation; the WarnerMedia spinoff isn’t scheduled to happen until next year.

For now, AT&T shares are stuck in a tough spot. Dividend-focused AT&T investors probably aren’t assigning as much value to their 71% share in the future WarnerMedia/Discovery business as Stankey would like, and they could be eager sellers of the new shares once they’re handed out. Meanwhile, the more growth-oriented investors who might like to bet on the new WarnerMedia/Discovery streaming business could be waiting to buy the pure-play stock without the weight of AT&T’s telecom business. That said, there is an opportunity in AT&T shares today; until the dividend is reduced post-spinoff, investors are getting a 7.6% annual dividend yield.

T-Mobile’s CEO Mike Sievert delivered a characteristically enthusiastic assessment of his company’s leadership in the 5G era, calling out competitors by name. The carrier has led the U.S. wireless industry in subscribers, service revenue, and earnings growth for several years, even before its acquisition of Sprint in spring 2020.

Sievert’s investor pitch is based on continued customer growth, thanks to an improved 5G network postmerger, plus billions of dollars in cost savings from greater economies of scale and the elimination of redundant expenses. Those savings will flow through to earnings and free cash flow, and T-Mobile said in March that it could buy back $60 billion in stock from 2023 to 2025. That’s a big chunk of its $157 billion market value.

For investors, however, the story around customer growth and synergies isn’t new or controversial. Barron’s recommended buying the stock in early 2020 at about $80 a share. T-Mobile closed the week near $130, and the shares now trade for about 38 times estimated earnings over the next year, compared with less than 10 times for AT&T and Verizon.

There’s one wild-card remaining for the entire wireless industry—growing competition from the cable companies. During Goldman’s conference, the CEOs of

Comcast (CMCSA),

Charter Communications (CHTR), and

Altice USA (ATUS) all gave bullish assessments of their nascent wireless products, which have added millions of subscribers in the past few years.

For now, the cable companies still rely on the incumbents’ wireless networks and, therefore, share some of the profits. But Charter and Comcast are making moves to more directly compete in areas where it makes financial sense to do so.

In short, there’s no lack of action in the U.S. wireless business these days. For the stocks, though, things may be less eventful, at least until some of the dust clears.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com