Investors got to spend a combined eight hours listening to telecom executives this past week, with back-to-back-to-back investor days from Verizon Communications, T-Mobile US, and AT&T on Wednesday through Friday. Management teams laid out their plans for newly acquired wireless spectrum licenses and hyped up their strategies for the 5G era.
AT&T’s depressed stock (ticker: T) was the biggest winner on its investor day, but for reasons unrelated to its core wireless business. Verizon (VZ) and T-Mobile (TMUS), meanwhile, both stuck to their tried-and-true messages: “Network, network, network” for Verizon, and “Leaving competitors in the dust” for T-Mobile.
Verizon was the biggest spender in the recently completed C-Band auction, having committed a whopping $53 billion for spectrum licenses and associated clearing costs. Management made that the centerpiece of its pitch on Wednesday evening. It expects to invest $10 billion to upgrade its network equipment to handle that spectrum—on top of an existing annual capital expenditure budget around $18 billion.
Verizon sees its 5G investments paying off in earnest in a few years. It said it expects to grow its service revenues by at least 2% in 2021, at least 3% in 2022 and 2023, and at least 4% in 2024 and beyond.
That’s not much, but it’s a decent clip for Verizon. In a saturated U.S. wireless market, management is focused on moving customers to higher-priced premium unlimited plans. It also pointed to new 5G monetization opportunities like mobile edge computing for enterprises and a wireless home broadband product, which it sees covering 50 million homes by 2025. Verizon stock slipped 2.8% after its event.
The highlight of AT&T’s presentation on Friday morning was not telecom-related. The company unveiled a significantly higher subscriber target for HBO Max and HBO, and management detailed plans for an advertising-supported tier and international launches. Other guidance and commentary was largely reiterating previous remarks.
That streaming focus seemed to be enough, and AT&T’s stock rose 0.9% on Friday. The company now expects to have up to 150 million streaming subscribers by 2025, versus its previous forecast—from late 2019—of up to 90 million.
The market lately has valued streaming services on revenue multiples and subscriber growth alone—very unlike AT&T’s slow-growth and capital-intensive telecom businesses. Netflix stock (NFLX) has long traded predominantly on its subscriber numbers, while ambitious targets from ViacomCBS (VIAC) and Discovery (DISCA) have recently sent those stocks soaring. But AT&T might not get as much credit given its conglomerate structure.
AT&T and Verizon remain appealing to value investors—Warren Buffett’s Berkshire Hathaway (BRK.B) recently took a stake in the latter—and neither management team did much to change that. Trading for about nine and 11 times forward earnings, respectively, and with hefty annual dividend yields of 7% and 4.4%, they certainly look attractive relative to the market. But there’s much more growth to be found elsewhere.
Coming about a year after its acquisition of Sprint, T-Mobile’s event on Thursday afternoon focused on the company’s progress integrating its former rival. T-Mobile management hasn’t been shy about its ambitions to win market share in the rural and suburban U.S. and with business customers—where it lags behind AT&T and Verizon today—and suggesting the merger will result in even larger benefits than when first proposed in 2018. Wall Street was expecting revised synergy and free-cash-flow targets.
T-Mobile delivered, lifting its merger-related annual cost-savings estimate by 25%, to $7.5 billion, and saying that its integration was a year ahead of schedule. The company now sees about $65 billion in cumulative free cash flow through 2025, some 20% more than before, which opens the door to a potential $60 billion of share buybacks from 2023 to 2025. T-Mobile’s current market value is about $157 billion.
But estimates along those lines were already in Wall Street’s consensus numbers. T-Mobile stock went from being up 1.9% on Thursday afternoon to close down 1.1% as the event continued.
Management execution over the coming years will be crucial, with the stock priced for success at about 48 times forward earnings. Nonetheless, T-Mobile remains the U.S. wireless industry’s most compelling growth story.