Why has AT&T dropped?
Based on its stock price, investors are questioning what happened to historical telecoms firm AT&T because it has been underperforming in the previous three years. From the record highs noted in 2016, AT&T's stock price is now less than 25%. The decline has a few main causes.
Competition in Wireless Market
The industry of cellular carriers has been fast becoming more competitive than it was a few years ago. Three main rivals for AT&T are Verizon, T-Mobile, and Sprint. Profit margins of the companies have also suffered from the intense competitiveness resulting from price cutting in family plans, unlimited data, 5G, and other offerings, particularly in recent years. This has compelled AT&T to supply even the market offerings and incentives that would draw additional customers. Although they are still gaining net new wireless consumers every quarter, they are doing so at lower rates, which lowers the ARPU and is detrimental to the financial sheets of the corporations.
Cord-cutting of Satellite/Cable TV
After acquiring DirecTV for $67 billion in 2015, AT&T ascended to rank as the largest pay-TV provider in the US. Concurrently, consumers have been progressively moving from traditional cable and satellite TV to less costly internet streaming companies like Netflix and Hulu. According to eMarketer, nearly 6 million American households will decide to cut off cable and satellite TV subscriptions by only 2022. From AT&T to billions in losses and a disastrous merger, this inclination has hurt DirecTV and other television providers.
High Debt Load
Over the past decade to finance acquisitions of DirecTV and TimeWarner, AT&T incurred significantly high levels of debt. They now have nearly $180 billion in debt outstanding. This means that AT&T has a lot of its cash flow dedicated to paying off interest, instead of reinvesting into the company to expand it. It also limits their ability to manage challenges flexibly. AT&T remains focused on debt reduction but it may take years and could be a constraint.
Dividend Cut
Being a tradition of raising the annual dividend for 36 years, AT&T had to slash the payout in December 2021 to pay off more amount of debts. Given that for many years it was considered a safe dividend stock, the decision to reduce the dividend affected investors and removed one of the key factors that supported the stock price. It reduced the dividend yield from above 7% to about 5% following the cut.
Accounting Issues
In Q3 2022, AT&T revised advertising revenues for the last couple of years because of accounting issues with the video advertising division known as Xandr. The specific restatements also impacted total revenues and triggered concerns about management supervision. Although potentially not affecting the total financials, investors do not like accounting issues and the resultant controversy can affect perception.
Spin-off of WarnerMedia
Reversing the $85 billion purchase of Time Warner in 2018, AT&T chose in 2022 to sell off WarnerMedia and combine it with Discovery. This allowed AT&T to concentrate especially on improving its primary business sector, cellular services. But from AT&T's financial sheet, the spin-off also eliminated WarnerMedia's earnings as well as any possible profits from properties such as HBO. For AT&T, these entertainment assets are thus very vital for diversification and development that the business could otherwise miss.
New Strategy Still Unproven
With the new CEO John Stankey, AT&T plans to focus on connectivity by investing in 5G and fiber broadband. The company believes that these networks will lead to the acquisition of more subscribers. They are looking forward to achieving cost synergies from the WarnerMedia spin-off and transitioning into a ‘telecom and network’ play. However, this strategic change is still untested, so there remains ambiguity regarding the direction of AT&T. This is because most investors usually have a negative attitude toward anything that is not certain.
In other words, increased competition and industry disruptions, significant debt, decreased financial leverage due to dividend reductions and divestitures, accounting scandals, and strategic risks have challenged AT&T’s stock. For the price to go back to the highs, AT&T management requires showing some solid signs of increasing revenues, improving margins, paying off the debt, and flawless implementation of a connectivity-driven strategy in the years to come. Due to the major problems that AT&T has been facing, the investors have been negative towards the future.
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