Competitors Slowed AT&T During Fourth Quarter, but Growth Remains Solid

AT&T Stock at a Glance

Current Morningstar Fair Value Estimate: $25

Stock Star Rating: 4 Stars

Economic Moat Rating: Narrow

Moat Trend Rating: Stable

AT&T Earnings Update

AT&T (T) isn’t attracting as many wireless customers as it was a year ago, but it continues to post solid results. Customer retention was strong, but Verizon and T-Mobile seem to have effectively countered AT&T’s promotional efforts, which began in earnest about two years ago. Management expects wireless customer additions will decline in 2023 as industry growth slows from the torrid pace of the past couple years, which will benefit cash flow, but the firm also signaled that it will work to continue gaining share. We are maintaining our $25 fair value estimate and think the stock remains modestly undervalued.

AT&T added 656,000 postpaid phone customers during the fourth quarter, down from 884,000 a year ago and placing it between T-Mobile (927,000 net additions) and Verizon (217,000). The rate of customer defections (churn) was flat versus the prior quarter, bucking the usual seasonal uptick as the impact of price increases taken over the summer appears to have run its course. On the weak side, however, the firm’s share of new customer decisions (gross customer additions) dipped during the quarter. Of the big three carriers, only AT&T attracted fewer gross additions than in the prior quarter.

Wireless service revenue increased 5.2% versus the prior year during the quarter. AT&T’s postpaid phone customer base has grown 3.5% over the past year and revenue per customer was 2.5% higher. The slowdown in customer additions and a slower customer upgrade pace pulled equipment revenue lower but provided a lift to profitability. The wireless segment EBITDA margin increased nearly 3 percentage points versus a year ago to 38%.

Free cash flow hit $14.1 billion for the year, modestly topping management’s revised target, which it cut from $16 billion over the summer. AT&T expects to generate $16 billion of free cash flow in 2023 while it continues to invest aggressively in its network but with slower customer growth easing working capital needs.