Investments Pressure AT&T but Lift Customer Growth

AT&T’s T fourth-quarter financial results weren’t great, but the firm is making progress in several areas, notably postpaid wireless and HBO Max. As with Verizon yesterday, AT&T’s inability to discuss the C-band spectrum auction is frustrating. Management cryptically promised to provide revised debt leverage targets after the auction concludes. While we don’t harbor concerns about AT&T’s balance sheet at this point, this uncertainty is not welcome, given the attention investors have paid to the debt load. AT&T ended 2020 with about $10 billion in cash and also reportedly lined up more than $10 billion in available credit earlier this month. As of now, we are sticking with our estimate that AT&T will spend around $20 billion for additional spectrum. Our fair value estimate remains $36, and we believe the stock is attractive.

Postpaid net phone customer additions at AT&T (800,000 versus 279,000 at Verizon and 824,000 at T-Mobile) were impressive for the second consecutive quarter, likely reflecting relatively aggressive phone promotions. Management again made the case for this activity, highlighting its desire to strengthen relationships with existing customers. The percentage of AT&T customers upgrading phones was the highest in three years, and we estimate the carrier has closed the gap with Verizon in terms of customers using newer devices. But this effort has come at a cost: Phone and commission expenses pulled wireless segment EBITDA down 6% year over year despite 0.5% services revenue growth. We expect AT&T will be able to dial back promotions as 2021 progresses, though it indicated it hopes to continue driving customer growth.

At Warner, the firm ended 2020 with nearly 42 million U.S. HBO Max subscribers, up 3.5 million during the quarter. The premier of Wonder Woman 1984 clearly had the desired effect on customer interest. HBO and a strong ad market couldn't offset weak studio results, however, with total WarnerMedia revenue down 10% year over year.

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