After Earnings, Is AT&T Stock a Buy, a Sell, or Fairly Valued?

AT&T released its second-quarter earnings report on July 23. Here’s Morningstar’s take on AT&T’s earnings and stock.

Key Morningstar Metrics for AT&T

• Fair Value Estimate: $26.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of AT&T’s Q2 Earnings

AT&T’s second-quarter revenue increased 3.5% from a year ago, the best pace in several years. Increased sales of wireless phones and growth in fiber broadband drove this result. Management roughly maintained its free cash flow target for 2025 despite expected tax savings from recent legislation.

Why it matters: Increased wireless competition has pushed more customers to switch carriers. This negative-sum activity hasn’t significantly hurt AT&T’s financial performance at this point.

• AT&T added 401,000 net postpaid wireless phone customers during the quarter, comparable with a year ago, but the number of gross additions and customer phone upgrades increased 20%. Wireless segment EBITDA margin declined slightly year over year due to higher customer acquisition costs.
• Consumer fixed-line revenue increased 5.8%. The company’s fiber broadband customer base has expanded 12% over the past year. Although small relative to the wireless business, surging consumer broadband profitability helped maintain AT&T’s consolidated EBITDA margin year over year at 38%.

The bottom line: We maintain our $26 fair value estimate and narrow moat rating for AT&T. We believe the shares are fairly valued and that Verizon is more attractive.

• Management acknowledged that the cost to attract and retain wireless customers has increased and expressed hope that competitive activity will dissipate over the rest of the year, echoing rival Verizon’s comments earlier this week. T-Mobile will report later on July 23.
• AT&T’s ability to earn excess returns on capital depends, in large part, on rational competition. We believe the structure of the US wireless industry enforces long-term competitive discipline.

Between the lines: AT&T expects a level of tax savings similar to Verizon from the extension of bonus depreciation. But AT&T plans to increase investment in its network and pension plans rather than passing these savings through to free cash flow.

Fair Value Estimate for AT&T

With its 3- star rating, we believe AT&T’s stock is fairly-valued compared with our long-term fair value estimate of $26 per share. That estimate assumes the firm will deliver modest revenue growth and gradually expanding margins over the next several years as its wireless and fiber network investments pay off, including efforts to retire its legacy copper phone network. Our fair value estimate implies an enterprise value of 7.3 times our 2025 EBITDA estimate and a free cash flow yield of about 8% based on management’s 2025 forecast.

In wireless, we expect AT&T will slowly gain market share over the next few years. We believe postpaid revenue per phone customer will grow modestly in a relatively stable competitive environment. However, with the recent spurt of competitive intensity, we have trimmed our pricing estimates modestly. We assume average revenue per postpaid wireless phone customer reaches nearly $61 per month in 2029, down from $62.

Read more about AT&T’s fair value estimate.

Economic Moat Rating

Wireless is AT&T’s most important business. Returns on capital in wireless have eroded somewhat in recent years as the company has spent heavily on wireless spectrum and put that spectrum to use. We estimate the wireless business produced a return on capital in 2024 slightly above 9%, or about 11% excluding goodwill, modestly higher than our estimate of the company’s cost of capital. These figures are down from about 10% and 12% in 2018. Over those six years, segment operating income is up 21% cumulatively while the invested capital base has expanded more than 30%, primarily on $40 billion of spectrum purchases.

We expect wireless returns will remain ahead of AT&T’s cost of capital. Verizon, AT&T, and T-Mobile dominate the US wireless market, collectively claiming about 90% of retail postpaid and prepaid phone customers and supplying the network capacity to support most other players. Providing solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base requires incremental investment in network capacity, a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about AT&T’s economic moat.

Financial Strength

Net debt stood at $120 billion at the end of the second quarter, putting net leverage at about 2.6 times EBITDA. This load is far higher than the company has operated under in the past: AT&T typically carried leverage of around 1.5 times EBITDA before 2012, when it instituted a large share buyback. However, the current debt load is still reasonably similar to Verizon’s and T-Mobile’s.

AT&T’s annual dividend payout totals about $8 billion, down from $15 billion in 2021. The dividend consumed about 50% of free cash flow in 2024 versus more than 80% in 2021. We think the dividend policy makes sense, leaving substantial excess cash flow to reduce leverage and make network investments, which we believe are vital to AT&T’s long-term health.

Read more about AT&T’s financial strength.

Risk and Uncertainty

Our Medium Uncertainty Rating reflects the volatility we expect AT&T investors will face relative to our global coverage. Regulation and technological change are the primary uncertainties facing AT&T. Wireless and broadband services are often considered necessary for social inclusion, in terms of employment and education. If AT&T’s services are deemed insufficient or overpriced, especially if in response to weak competition, regulators or politicians could step in.

Regulators also control the flow of wireless spectrum into the industry, which has created scarcity in the past, pushing carriers to pay high prices for licenses. We suspect that when large spectrum blocks are made available, such as the 2021 C-band auction, the carriers have felt compelled to bid excessively to keep potential entrants out of the market, especially the cable companies. Recent legislation has directed the Federal Communications Commission to make large blocks of spectrum available in the coming years.

Read more about AT&T’s risk and uncertainty.

T Bulls Say

• Following a period of investment, AT&T will hold a nationwide 5G wireless network with deep spectrum behind it and a fiber network capable of reaching around one-third of the US population
• AT&T has the scale to remain a strong wireless competitor over the long term. With three dominant carriers, industry pricing should be rational going forward.
• Combining wireless and fixed-line networks with new technologies and deep expertise makes AT&T a force in enterprise services.

T Bears Say

• The cost of maintaining dominance in the wireless industry by controlling spectrum has been exceptionally high over the years. AT&T has spent $40 billion since 2020 for licenses with few prospects for incremental revenue.
• Advancing technology will eventually swamp AT&T’s wireless business, enabling a host of firms to enter the market, further commoditizing this service
• AT&T’s debt load will catch up with it. The firm carries far higher leverage than it has historically, and its dividend payout remains high. Prematurely buying back shares will further hamper the balance sheet

This article was compiled by James Ubi.