AT&T Earnings: Wireless Competition Remains Challenging; Full Steam Ahead on Network Investment

Key Morningstar Metrics for AT&T

• Fair Value Estimate
  : $27.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of AT&T’s Earnings

AT&T’s T revenue grew 2.9% in the first quarter, as wireless phone sales again jumped and the acquired Lumen business made a small contribution. Margins and cash flow were weaker than a year ago due to seasonal and one-time items. Management maintained expectations for the year.

Why it matters: We’ll get a clearer picture of the US wireless industry as other carriers report, but AT&T’s results indicate that competitive intensity remains elevated. Postpaid phone customer disconnects (churn) increased 9% year over year and 29% from the first quarter of 2024.

• Wireless services revenue growth of 1.7% was the slowest in five years, as average revenue per postpaid phone customer was flat with a year ago. Management expects growth to accelerate to 2%-3% for the full year, primarily on customer additions, with some benefit from recent price changes.
• AT&T expects revenue per customer to remain under pressure as it targets lower-end segments and offers bundle discounts with broadband. We believe AT&T and Verizon have had to limit price increases and offer generous promotions to counter T-Mobile and the cable companies.

The bottom line: We don’t expect a significant change to our $27 per share fair value estimate. AT&T’s convergence strategy should drive consistent customer growth, but with very heavy capital spending demands. We would look for a larger margin of safety before investing, given the industry’s uncertainties.

• We believe returns on invested capital will increase as fiber customer penetration grows and costs come down, especially with the shutdown of legacy phone networks. However, this view and our Narrow Morningstar Economic Moat Rating are largely based on efficient scale driving rational competition among carriers.
• While competition in the wireless business is moving against our thesis, we expect the environment to improve over the next year. Each carrier is discussing the need to sell service based on network attributes rather than on aggressive phone discounts.