Analyst: AT&T could see long-term growth from Mexico, connected car

AT&T Mobility (NYSE:T) has strong future growth opportunities both domestically and in Latin America, as it pushes more into the Internet of Things and Mexico, according to a report from Wall Street firm Credit Suisse.

Credit Suisse analyst Joseph Mastrogiovanni, reporting on a one-on-one meeting he had with AT&T CFO John Stephens, wrote in a research note that Mexico is "an attractive opportunity for AT&T given regulatory pressure on the incumbent operator, the current three player dynamic, AT&T's spectrum position and the economic outlook for the country."

AT&T closed its $1.88 billion deal for Nextel Mexico at the end of April, a few months after it closed a $2.5 billion deal to purchase Mexican wireless carrier Iusacell. AT&T's goal is to create one seamless LTE and calling network between the U.S. and Mexico covering more than 400 million POPs. However, AT&T CEO Randall Stephenson said in May it will likely be around 18 months before the carrier can deliver a truly strong LTE data experience beyond urban areas in Mexico. 

"While AT&T will admittedly have to invest to build out a substantial network, the investment should be reasonable relative to AT&T's size," Mastrogiovanni wrote. "It could take some time to reach profitability, as with any 'new' business, but the payoff could be sizable following its initial ramp."

Interestingly, he added that AT&T appears to be open to moving into markets in Latin America, like Brazil, but Stephens downplayed the likelihood of any immediate activity. "Given DirecTV's (NASDAQ: DTV) assets in Brazil, we expect AT&T to evaluate its opportunities there, but it may not be as attractive as Mexico," Mastrogiovanni added, noting that he continues to think AT&T's $48.5 billion deal for DirecTV will be approved shortly.

AT&T has spent the last several years investing in the connected car market and has deals with General Motors, Nissan, Audi, Tesla, BMW, Subaru, Ford Motor Co. and Volvo. The carrier has also aggressively pushed its Digital Life home automation and security business. While these units are not generating a lot of revenue for the company right now, Mastrogiovanni wrote they could down the line.

"While still a small part of AT&T's revenue stream, new services should be a tailwind to revenue growth," he wrote. "The company has been rolling out connected cars, with millions already in the market. While the revenue stream is almost non-existent currently, we should see a lift as promotional periods start to roll off later in the year and into 2016. Additionally, the company's home automation service continues to grow. Finally, we believe the largest opportunity may be in the company's ability to eventually monetize big data (the large buckets of information it can get from its customers devices), anonymously of course." 

In terms of its core business, Mastrogiovanni noted that following the one-year anniversary of the introduction of Mobile Share Value plans, through the rest of 2015 AT&T's year-over-year average revenue per user comparisons should "start to normalize." Coming off record-low first-quarter postpaid churn of 1.02 percent, AT&T's management "feels very comfortable with churn trends throughout 2015. There should be typical seasonal patterns, but the benefits of Mobile Share Value and Smartphone adoption should continue to benefit churn."

Related articles:
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AT&T's Stephenson: It will take 18 months to build out 'robust' LTE coverage in Mexico
AT&T exec: It will take 'a couple of years' to reshape, improve Mexican wireless biz
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