Telecom giant AT&T (NYSE: T) is vastly underperforming the S&P 500 in 2023. With just a few trading days left in the year, AT&T stock is down nearly 10% year to date while the S&P 500 has gained 24%.
AT&T has to deal with a lot of problems, such as tough competition, a lot of debt, and an uncertain market. But buyers shouldn’t stay away from the stock just because it did badly in 2023. This is why AT&T stock could really go off in 2024.
1. Steady growth in subscribers
Since the pandemic, AT&T’s main telecom business has slowed down, but the company is still adding new customers at a good rate. AT&T said that postpaid phone net adds were 468,000 in Q3 2023, which was more than the first and second quarters.
That’s not as good as T-Mobile’s 850,000 net new postpaid phone subscribers in Q3, but it’s much better than Verizon’s measly 100,000 net new postpaid phone customers. AT&T’s churn stayed low—in the third quarter, only 0.79% of prepaid phones switched providers. Verizon’s number is only 0.9%.
Fiber internet is another way for AT&T to grow in the long run, along with wireless internet. In the end, fiber growth is limited by how quickly the company can build out its network, which takes a lot of money. At the end of the third quarter, AT&T’s fiber network had reached 20.7 million sites, up from 15.5 million the year before. At this point, 39% of the places that were passed are paying fiber users, which is called the penetration rate.
AT&T is losing customers to its older speed internet plans, but its fiber business is making up for it. In Q3, 296,000 new fiber net subscribers were added, which was enough to slightly raise the total number of internet subscribers. Customers pay more for fiber than for traditional broadband, so even if the number of broadband subscribers doesn’t grow quickly, companies can still make more money from broadband.
In 2024, AT&T’s results will be affected by the state of the economy. However, the company has been able to keep winning users even with high inflation and economic uncertainty in 2023.
2. Free cash flow going up
AT&T thinks that it will have $16.5 billion in free cash flow in 2023. In the past, they thought it would cost at least $16 billion. More than that, it’s a big jump from the $14.1 billion in free cash flow the business made in 2022.
There are many things that affect AT&T’s free cash flow. This important measure is affected by when customers pay, when capital is spent, and when DirecTV tells people about certain things. It is said that the company is thinking about selling its 70% share in DirecTV, which would make things easier.
As we move toward 2024, AT&T’s capital spending should slow down a bit because the company has reached the peak of its 5G investment cycle. Though AT&T hasn’t said anything yet, their CFO Pascal Desroches says they expect “a step-down in capex from the elevated levels we’ve been at in ’22 and ’23.”
If everything stays the same, free cash flow should go up in 2024 thanks to less spending on capital and more subscribers. Another reason could be that AT&T recently decided to add more flexible radio access network technology to its wireless network. Over the next five years, AT&T will spend up to $14 billion adding hardware and software that will make things simpler, more flexible, and cheaper. Any money saved on major purchases can be put toward other areas that will help the business grow, such as fiber internet.
If nothing bad happens to the economy, AT&T’s free cash flow should keep going up in 2024.
3. Great valuation
AT&T is worth about $119 billion. This stock has a price-to-free-cash-flow ratio of just over 7 based on what the company says it will do.
The fact that AT&T has a lot of debt is not a good sign for investors. At the end of the third quarter, it owed $138 billion. Since interest rates aren’t as low as they used to be, AT&T may have to pay more in interest as it refinances this debt over time.
AT&T’s debt payments are spread out, which is good news. The company hopes to settle its debts with cash on hand over the next two years. It’s likely that AT&T’s average weighted interest rate on its debt will go up at some point, but it won’t happen any time soon. AT&T has a problem with debt, but it’s not too bad.
AT&T isn’t a company that’s growing quickly, but the price of the stock seems way too low. It’s possible that the stock will be worth more in 2024 if the telecom giant is able to increase its free cash flow.
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