Telecom & Wireless

Analysts Now Showing That AT&T Will Win From Cord-Cutters

Jon C. Ogg

Published: March 2, 2016 11:15 am

Last Updated: January 13, 2020 12:28 pm

AT&T Inc. (NYSE: T) finds itself a new company in 2016. After completing the DirecTV acquisition last year, AT&T has another stream of revenues on top of the growth in wireless connectivity from the Internet of Things. And now AT&T wants to win in the “over the top” options aimed at the so-called cord-cutters.

This trend of the rise of cord-cutters has represented a threat to traditional cable companies selling the huge bundles and huge channel packages to consumers. By dropping the cable box, those who spend hours of TV can migrate to services through the Web via Amazon, Google, Netflix, Hulu, Roku and a host of others — even from their gaming consoles.

There is just one problem that the cord-cutter threat fails to address. Sure, it may be lower revenues than the massive bundle. What is still needed is that consumers demand lightning fast Internet access — and video content and media through an Internet pipe has to have a fast connection.

AT&T recently announced plans to launch three new over-the-top DirecTV services aimed at the cord-cutters. These offerings will allow customers to access and stream DirecTV video services over a wired or wireless Internet connection, from any provider and from most devices, via smartphone, tablet, Smart TV, streaming media hardware or even personal computer.

The three new affordable video offers target customers looking for premium content with choice and flexibility in what they want to watch and how they want to watch it. Each service will come with a set number of simultaneous sessions, and they will not require annual contracts, satellite dishes or set-top boxes.

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The new “cross carrier” service does not require a satellite dish, set-top box, or an installation. The new products compete with recently launched OTT offerings such as Dish’s Sling TV, which offers a “skinny bundle” of channels for as little as $20 a month, and Verizon’s Go90 smartphone video platform. However, AT&T hopes to differentiate its new products by offering more content than is available through the two rival offerings. The company has yet to release details on content options and pricing.

Merrill Lynch recently reiterated its Buy rating, and the firm also has a $40 price objective. Merrill Lynch’s report said:

Our $40 price objective reflects our view that the shares should trade in line with their five-year average discount relative to Verizon. Verizon has traded at an average 15% premium P/E multiple to AT&T over the last five years. We believe the historical discount is warranted based on AT&T’s lower wireless margin and less defensible market share. We believe the valuation gap should return to historical levels, based on our view that the DIRECTV acquisition will drive higher rates of revenue, EBITDA and FCF growth. Risks to our price objective are lower-than-projected growth and greater wireless competition.

AT&T shares were last seen down 0.5% at $37.21 on Wednesday, in a 52-week range of $30.97 to $37.50. What stands out here is that AT&T is now nearing a 52-week high — with a 5.2% dividend yield to boot.