Should I invest in AT&T?

AT&T may not be familiar to you because the company does not operate under that name in Europe. But here's a heads-up: this huge business conglomerate is the world's largest telecommunications and entertainment company, owned the phone patent for decades, and is behind the production of series such as Succession and Euphoria. 

AT&T's stock market performance is, however, rather mediocre. 

If you had invested €1,000 about 5 years ago, in early 2017, it would now be about €660 in your portfolio - that's right, losses! The same amount of money invested in an ETF tracking the S&P 500 - the average of the 500 largest US companies - would have turned into about €2,050.

But, why is this empire in decline? And more importantly: does AT&T have any promising future plans worth investing in? 

From the invention of the telephone to a fragmented monopoly

AT&T has a long history defined by patents related to telephone communication that enabled ambitious expansion plans, followed by spin-offs forced by antitrust regulators, acquisitions, mergers and diversification into the world of communication and entertainment. 

Alexander Graham Bell obtained the patent for the invention of the telephone (although authorship is controversial) in the late 19th century and set up a company to commercialise this key technological breakthrough. The Bell Telephone Company expanded across the United States, creating the infrastructure for the country's telephone network, and changed its name several times, eventually becoming the American Telephone and Telegraph Company.

In the 60s and 70s, the Federal Communications Commission took measures to end its monopoly and divided it into 7 companies. Paradoxically, over the years they have ended up regrouping into two conglomerates: AT&T and Verizon, one of its main competitors.

In 2016, AT&T decided to diversify and enter the entertainment market with the costly acquisition of Time Warner ($102 billion in total), which was renamed WarnerMedia in 2018. They will soon go their separate ways, though.

How does AT&T make money?

The revenue that AT&T generates annually is massive. It is, in fact, the 26th company in revenue worldwide according to Fortune. Until 2019, the telecommunications giant had maintained steady growth, but since the pandemic began, surprisingly, it has started the opposite trend: from $181 billion in 2019, it fell to $171 billion in 2020 and $168 billion in 2021. 

AT&T is a conglomerate with several business lines, but first and foremost, it is a telephone company. In its latest earnings report, Q4 2021, we can see in more detail where the money is coming from.

Its core segment, Communications, is dedicated to providing telecommunications products and services. Within it, the Mobility unit, which offers wireless equipment and related services, generated more than half of the revenues, $21 billion of the $41 billion total, up 5% from the same period last year. 

The company also provides wireline and broadband for businesses and consumers, i.e. phone lines and fixed and mobile internet. It collects much less from this, about $9 billion in Q4 2021, but is the largest US operator in terms of market share (44.8% in Q1 2021).

WarnerMedia is, interestingly, the segment that grew the most in the last year: 15% to almost $10 billion. HBO and HBO Max gained 13 million subscribers globally to 73.8 million. But soon this part of the company will cease to be part of the group - expected sometime in the second quarter of 2022 - and will merge with Discovery Inc. So don't count on this as a source of future revenue. 

In short, we can see that AT&T continues to maintain a strong hold on the US telecommunications market thanks to its historical control over the infrastructure.

The telecoms market

Bad news for conspiracy buffs: 5G is already here to stay. Even if your phone doesn't have it yet, the next one you buy will.

T-Mobile US, a carrier owned by Deutsche Telekom, is its main competitor in this type of technology. This company was the first to adopt and expand the 5G mid-band network in the United States in 2020, when it merged with another competitor called Sprint. The download speeds offered by T-Mobile are much faster than any other telecommunications company in the country. This has boosted its stock market performance, putting it ahead of its competitors.

Since the beginning of this year, Verizon and AT&T have been trying to follow in T-Mobile's footsteps, although their rollout has been rather slow. AT&T now wants to invest $48 billion by the end of 2023 to expand its 5G wireless and fibre internet services, which will likely be financed with funds from the WarnerMedia-Discovery deal.

Is it worth investing in AT&T?

In 2018, AT&T thought the way to keep growing its phone and internet user base was to bundle streaming services. The acquisition of Time Warner cost a huge sum of money, and carried debt. 

Although WarnerMedia seems to be doing well, competition in online video services is fierce. And AT&T, after all, is a phone company at a pivotal moment that requires major investments in innovation - in addition to dealing with significant debt. 

With the sale of Warner, AT&T will get some relief on its books and capitalisation to focus on investing in 5G, as the company's CEO, John Stankey, has already announced.

The downside for investors? AT&T has traditionally offered good dividends to shareholders - they have been growing for 36 consecutive years! However, with the company splitting up, they are planning to slash it, which has been received as a debacle for its shareholders.

Most analysts currently rate it as a "hold" and this, coupled with the general trend of investors nowadays to go for growth rather than traditional value, means that this dinosaur is not to everyone's taste. 

We can only say that past performance does not necessarily define future development, so the investment decision is, as always, up to you.

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