AT&T faces challenges in both wireless, entertainment

smartphone video
Deutsche Bank has lowered both its outlook for AT&T’s earnings per share and the stock’s price target for 2017 and beyond, but Barclays says the carrier’s ongoing moves to virtualize its network should help offset some financial difficulties.

Deutsche Bank lowered both its outlook for AT&T’s earnings per share and the stock’s price target for 2017 and beyond, citing challenges in both the wireless and media industries. But the carrier’s ongoing moves to virtualize its network should help offset some financial difficulties, according to Barclays.

AT&T’s wireless business posted some lackluster fourth-quarter results last week that generally managed to meet analysts’ expectations. The No. 2 U.S. carrier lost 67,000 postpaid net phone customers, marking its ninth consecutive quarter of defections—but significantly beating analysts’ expectations—and wireless revenue was 0.7% lower than the year-ago period as ARPU continued to slide.

And as growth in the U.S. wireless market has slowed to a crawl, AT&T has moved more aggressively into media than its counterparts. The carrier recently launched DirecTV Now, an ambitious OTT offering built on last year’s $49 billion acquisition of the satellite TV provider, and it hopes to double down on that strategy with its proposed $85 billion takeover of Time Warner.

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Deutsche Bank lowered its projected earnings per share for AT&T to $2.91 for 2017 and 2018, though, “reflecting lower margins” due to difficulties in both the wireless and entertainment industries. And it lowered the 12-month target price for shares of the company from $43 to $42, retaining its “hold” rating.

Shares of AT&T were trading at $41.90 early this morning.

“Better wireless volumes (in U.S. and Mexico) were certainly a factor (in the reduced projections), but we still believe the path towards meaningful top-line/EPS growth gets tougher given headwinds from competition/market maturation AT&T faces in wireless (roughly 45 percent of revenue) and entertainment (roughly 33 percent of revenue,” the firm said in a research note to investors. “While we are positive on AT&T’s investments to sustain growth, we nonetheless believe the setup remains difficult in key segments given heavy competition and market maturation. … More broadly, we believe the challenges facing AT&T on its core distribution business validate the (sooner than expected) timing of the announced Time Warner deal, which looks incrementally more accretive following another round of negative estimate revisions at the core business.”

In its own note to investors, Barclays analysts said that while early traction for DirecTV Now has been impressive—more than 200,000 users have signed on since its launch several weeks ago—competition in the video market will only increase. The firm predicted revenues from AT&T’s core wireless service will decline 0.4% throughout 2017, but said savings from an increasingly virtualized network should help buoy the bottom line.

“However, management plans to offset this top-line pressure (in wireless) with the continued transition to SDN/NFV (currently ~34 percent of the network has been virtualized) which should allow for continued margin improvement,” Barclays wrote. “While we see multiple levers for margin expansion going forward, as our expectations highlight, AT&T is nonetheless not inoculated from wireless industry pressure. Moreover, we wouldn’t be surprised if management opts to take some of those anticipated savings and utilize them to be more competitive in the market—i.e. a reversal of its stance over the last several quarters.”

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