5G is here. AT&T, Verizon and T-Mobile must prove their worth to investors


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Verizon Communications CEO Hans Vestberg told investors last week: “Our strategy is the network.

David Paul Morris / Bloomberg

A who’s who of the media and telecommunications world gathered last week at Goldman Sachs’ annual Communacopia conference, held virtually for the second year in a row.

Most executives described their companies as being in a period of transition to new business models or technologies. On the media side, the emphasis remains on direct-to-consumer streaming. Telecommunications players, for their part, are deploying fifth generation wireless networks, or 5G, and extending their wired optical fiber footprint, moving from 4G and copper.

Top wireless CEOs doubled down on their unofficial corporate creeds:


Verizon Communications

(ticker: VZ) as network nerds,


AT&T

(T) as number calculators, and


T-Mobile United States

(TMUS) as a rambling upstart.

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

He highlighted “five drivers” of growth in the 5G era, including pushing customers to more expensive plans, new products like fixed broadband wireless access and mobile computing, and increased monetization. of its 5G network through wholesale agreements.

Verizon previously issued a long-term target of 4% annual revenue growth in the coming years, which would follow a generally stable sales performance over the past half-decade. It seems like a story to show for investors: Verizon stock has lost 2.5%, after dividends, since the forecast was unveiled on an Investor Day in March, while the


S&P 500

the index returned 15%.

AT & T’s John Stankey presented investors with his investment thesis on the company’s shares, calling them undervalued on the sum of the parts basis, which includes AT & T’s telecommunications business – both wired and wireless – and the future subsidiary of 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 asserts that the market currently values ​​AT & T’s media business as a “cable network asset,” presumably referring to


ViacomCBS

(VIAC) and Discovery, whose shares are trading at less than 10 times earnings over time. This compares to 36 and 47 times, respectively, for shares of


Walt disney

(DIS) and


Netflix

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

“My belief is that as we go through this we should see that [valuation] many are starting to recognize that there is a great direct-to-consumer business that should be valued the same way the market values ​​other large direct-to-consumer businesses, ”Stankey said last week.

Stankey and AT&T could wait a bit for this higher valuation; the WarnerMedia spin-off is not expected to take place until next year.

For now, AT&T shares are stuck in a tight spot. Dividend-focused AT&T investors probably don’t value their 71% stake in the future WarnerMedia / Discovery company as much as Stankey would like, and they could be enthusiastic sellers of the new stocks once they do. will be distributed. Meanwhile, more growth-oriented investors who would like to bet on the new WarnerMedia / Discovery streaming business might wait to buy the pure-play stock without the weight of AT & T’s telecommunications business. That said, there is an opportunity today in AT&T stocks; until the dividend is reduced after the split, investors get an annual dividend yield of 7.6%.

T-Mobile CEO Mike Sievert delivered a typically enthusiastic assessment of his company’s leadership in the 5G era, calling competitors by name. The operator has led the US wireless industry in terms of subscribers, service revenues and profit growth for several years, even before its acquisition of Sprint in the spring of 2020.

Sievert’s pitch to investors is based on continued customer growth, through improved 5G network post-merger, as well as billions of dollars in cost savings through greater economies of scale and the elimination of redundant spending. Those savings will trickle down to earnings and free cash flow, and T-Mobile said in March it could repurchase $ 60 billion of shares from 2023 to 2025. That’s a large chunk of its market value of $ 157 billion.

For investors, however, the story of customer growth and synergies is neither new nor controversial. Barron Recommended to buy the stock in early 2020 at around $ 80 a share. T-Mobile closed the week at nearly $ 130, and shares are now trading at around 38 times estimated earnings over the next year, compared to less than 10 times for AT&T and Verizon.

There remains a wild card for the entire wireless industry: growing competition from cable companies. At the Goldman conference, CEOs of


Comcast

(CMCSA),


Communication Charter

(CHTR), and


Altice United States

(ATUS) have all given upbeat ratings of their nascent wireless products, which have added millions of subscribers in recent years.

For now, cable companies are still dependent on incumbent wireless networks and therefore share a portion of the profits. But Charter and Comcast are taking steps to compete more directly in areas where it makes financial sense.

In short, there is no shortage of action in the wireless industry in the United States these days. For stocks, however, things can be less hectic, at least until some of the dust clears.

Write to Nicholas Jasinski at [email protected]


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