AT&T Q3 Reaction: Not Even a Record Quarter Can Boost This Stock

AT&T’s core business delivered another strong quarter in Q3, and it could be proof that the telecom giant is finally back on track. But don’t be fooled: This company is still struggling to prove its value to investors, and CEO John Stankey has a long way to go to build back trust. 

Shares of AT&T have been on a steady decline over the past several years, and the WarnerMedia spinoff news didn’t help as much as expected. The stock fell about 13% so far this year, while the broader market gained more than 22% during the same time period. On top of that, AT&T stock sank roughly 18% since the WarnerMedia-Discovery merger was announced on May 17. 

AT&T shares were volatile following its third-quarter results. After rising about 1% in the pre-market session, shares teetered between gains and losses at the start of the regular trading session. AT&T stock closed 1% lower Thursday.

Here was the good news from the third quarter: AT&T’s communications business didn’t see the deceleration that many on Wall Street had been expecting, at least not yet. It added a whopping 928,000 postpaid wireless subscribers, which was a 44% increase from the year-ago period and a nearly 18% gain from Q2. Revenue from its mobility business jumped 7% to $19.14 billion. Management noted that it was the best postpaid phone net add quarter in more than 10 years. 

Earlier this week, rival Verizon reported that it added 429,000 postpaid wireless customers in Q2, and T-Mobile is scheduled to release results Nov. 2. That strong gain in postpaid wireless subs likely came from the aggressive promotional war being waged over the past couple of years by the largest wireless carriers. Though the promotional war will cost a hefty chunk of money for AT&T and its rivals, retention is the primary concern in a highly competitive market. Analysts have estimated the aggressive wireless promotions cost AT&T roughly $2 billion a quarter. 

But here’s where the company and Stankey have a lot of work to do. AT&T ended up hurting all facets of its business in a desperate attempt to become a media behemoth over the past three years or so. The Q3 mobility revenue growth, which accounted for nearly half of overall revenue, is certainly good news when the company is attempting to turn a new leaf.  

AT&T spent more than $160 billion to acquire both DirecTV and WarnerMedia. Following those acquisitions, AT&T’s balance sheet is one of the weakest in the industry. The telecom company has a massive debt load of more than $170 billion. But it is trying to claw its way back and divesting and spinning off its media units is the start. 

As financial conditions worsened at the company, Stankey had to make some pretty tough decisions along the way, which included taking measures like announcing a pretty sizable dividend cut. The nearly 50% dividend cut is set to go into effect as soon as the WarnerMedia-Discovery deal closes, and although it was anticipated to happen for some time, it was still a major gut punch to investors. 

WarnerMedia and Discovery are still on track to complete their merger in the first half of 2022, which should free up much needed capital and energy to refocus on its telecom roots like further building out fiber and its 5G network. But rebuilding takes time and a lot of money and will be especially hard if you’re starting at a disadvantage. 

Furthermore, a much more focused business has its own set of challenges. One thing that’s been clear lately is that investors care about a good growth story. Stocks don’t necessarily always trade on the strength of its fundamentals these days. So, what will AT&T’s growth story be? Even though AT&T’s media business presented so many issues, it was still something Stankey could point to as a growth engine for the company.  

There are just so many unknowns in AT&T’s future that it is hard for investors to see the value in the stock. But there is a sliver of good news in the underperformance of AT&T. The stock is relatively cheap compared to the broader market, so if there was a so-called buying opportunity ahead of some big changes, you could argue that now’s the time. 

With more than half a year left until the WarnerMedia spinoff, Stankey has a lot of strategizing to do to regain investor confidence. It is a new dawn for AT&T, and what management does over the course of the next year or so could alter the future for the company. If Stankey can robust maintain wireless growth all while successfully rebranding a hurting image, investors could begin to stand behind the newly razor-focused company.