January 03, 2021 - 6:50pm EST by
2021 2022
Price: 28.76 EPS 3.18 3.45
Shares Out. (in M): 7,125 P/E 9 8.3
Market Cap (in $M): 204,915 P/FCF 9 8.3
Net Debt (in $M): 149,000 EBIT 0 0
TEV (in $M): 353,915 TEV/EBIT 0 0

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AT&T (T) looks like one of the best risk/rewards in the stock market with 75%+ short-term upside potential. I am going to keep this write-up brief, because my thesis and differential view is simple. estimate that T is incredibly undervalued on virtually any metric, and one of the primary catalysts that will drive the stock higher, is that HBO Max will dramatically beat subscriber expectations, causing a revaluation of the stock. I think there is very little downside if I am wrong, with the stock trading near a ten-year low, at a FY21 P/E of 9x, and with a stable div yield of 7.3%. In fact, if I am wrong, I still expect the stock to go up, but to a lessor degree, driven by its undervaluation and investors looking for high dividend stocks in 2021. This is a timely idea because I believe the primary catalyst of T reporting or raising subscriber expectations could happen any day, but should certainly happen on 1/27/21, when the company is expected to report FYE20 results.
Why Does This Opportunity Exist? The dramatic under-valuation of T is due to three primary factors: 1) The market has not properly factored into T stock, HBO Max’s positive value and prospects; 2) Year-end tax loss selling and portfolio adjustments; and 3) lack of investor focus on T’s discounted valuation.
ValuationI estimate T’s current fair value is approximately $51, or 78% higher, which is based on the average of 3 valuation methodologies, including Forward P/E (P/E), Price to Book (P/B), and historic discount to the S&P P/E multiple (DS&P). Over the last 11 years, T has been valued at an average P/E, P/B and DS&P of 12x, 1.7x, and 39%, versus the company’s current metrics of 9x, 1.17x, and 76%. By simply applying the 11 year average valuation multiples to T’s current metrics, I derive a valuation on a P/E, PB, and DS&P basis, of $38, $42, and $73. The average of these three metrics results in my target price of $51, which equates to a P/E of 16x. However, if my HBO Max thesis works out as I project, T stock could easily move significantly above my current target price. In this instance I would project T could trade at a P/E of 20x and a stock price of $63.5. *some numbers from yahoo finance
HBO Max (HBOM): HBOM currently has among the most extensive and highest quality content libraries of any streaming platform, and I believe they will end up as a strong number three streaming sevice behind Netflix and Disney+. As a testament to the strength of HBOM’s content, they won 30 Emmy Awards in 2020, which was the best of all platforms, with Netflix a distant second place with 21 wins. HBOM content is too extensive for me to list in this report, but it includes over 10,000 hours of streaming, including, the Game of Thrones franchise, Friends, the entire DC Universe, Watchmen, Raised by Wolves, South Park, Big Bang Theory, all WarnerMedia’s content, Warner Bros films, and 100s of more titles and franchises. Although HBOM presently represents a small portion of T’s current revenue stream, I expect it to grow significantly above current expectations, and to eventually become a large portion of T’s earnings, while increasing growth for the entire company.
HBOM was launched on May 27, 2020 and initially got off to a slow start, because T made the decision to launch the service a bit prematurely, in order to get it quickly into the market. The initial uptake of HBOM was tepid, because it was launched without the two largest distribution platforms (Amazon and Roku) offering the service. Also, there were several initial HBO service plan options that were confusing to consumers. Investors soured on T stock due to what seemed like a bumbled launch, driving the massive underperformance. However, I believe in retrospect this strategy made sense, because time was of the essence to gain a competitive foothold, and to set the foundation for HBOM to build upon. All the initial problems with the HBOM’s launch have been resolved, with the recent simplification of the HBO service plans, and the signing of distribution deals with both Amazon and Roku, giving an additional 80 million+ accounts access to the HBOM platform. The Amazon and Roku deals were signed November 16th, and December 16th. Market research firm Park Associates also noted in a report (after the Amazon deal but before the Roku deal was announced) that,
“For WarnerMedia, the benefits for being on the Amazon platform are clear. Fire TV ranks as one of the
leading connected video platforms, making up 15% of the total hours spent viewers spend watching
online videos on a weekly basis. Dallas Business Journal reports that WarnerMedia is negotiating a
similar deal with Roku, which leads with 25% of hours spent watching online videos. With these
developments, HBO Max is in a good position to continue its ascent towards the Big 3 in OTT as it
continues to produce originals and expand its content library in 2021. The addition of an ad-supported
subscription tier in 2021 will also likely boost HBO Max’s subscriber base significantly.”
Additional tailwinds for HBOM were announced during the third quarter when T decided they would be releasing Wonder Women in 2020, and all of Warner Bros 2021 movies on HBOM the same day as the theatrical release. The 16 feature films Warner Bros plans to release on HBOM in 2021, makes the $14.99 per month subscription fee look like the best value among all streaming competitors, when factoring in the money saved by not going the theatre. Warner Bros 2021 slate of releases include 16 movies, many of which could be blockbusters such as Matrix 4, Dune, Godzilla vs. Kong, and The Suicide Squad among others. T also plans to launch an international version of HBOM which could add 10s of millions of subscribers, which I expect to be released in the first half of 2021. It is clear and logical that all of these new developments should lead to a dramatic acceleration in subscribers for HBOM. Almost all of these positive announcements occurred in the 3rd quarter, and they have not yet been reflected T’s, or most analysts’ estimates.
Further strengthening my bull case, were John Stankey’s (T’s CEO) 12/8/20 comments, when he stated at a conference that,
We've had great success migrating customers into HBO Max from our legacy HBO products and
establishing a more direct relationship with us. We told you it was about 8.6 million customers at the
end of last quarter. That progress will accelerate. We're in a good place today. We're sitting here from
8.6 million at the last quarter close to, I think, probably tomorrow, we'll be about 4 million higher at 12.6
million. That's incredible pace by traditional standards of people authenticating and using the product
and being part of it. Putting the slate out there is only going to accelerate that further, and getting those
active engaged users is so important to us. And the amount of hours that they engage on the platform is
really, really critical, and the theatrical experience is going to help that. We've had great progress on
If you just look at the last 30 days alone, the number of hours engagement on HBO Max is up over 1/3.
It's about 36% because of the great performance of new content like The Undoing and the Flight
Attendant. And so as we get out of the COVID dynamic, where we can play our game on content, both
theatrical and what we're doing on scripted, that's going to be a good thing... And as I said, even without
the theatrical slate, we're sitting up almost 12.6 million subscribers authenticated and moving into the
HBO platform now. “
I project that HBOM could add an additional 50 mil global subscribers within three years, which would drive significant growth in T’s revenue and earnings streams. I estimate that 50 mil additional subscribers paying $14.99 per month would add $0.76 to T’s EPS within 3 years, which is 24% above FY20 consensus estimated EPS of $3.18Additionally, I believe that T will enjoy significant margin expansion as they move their WarmerMedia content tHBOM, because T will gain the economics of their network and cable distributors as they are disintermediated, which I have not factored into my numbers. The $0.76 in additional EPS could be worth $19+ per T share, assuming this EPS stream gets a 25x P/E multiple, which may be conservation given the growth profile. Furthermore, I think the 50 mil add estimate could be conservative based on all the recent positive developments at HBOM. As reference, the HBO platform currently has around 57 mil global subscribers, although HBOM has only launch in the US thus far. As comparison, Disney+ and Netflix have global subscriptions of 86.8 mil and 195 mil. On December 10th, Disney+ reported subscriber additions of 13.1 mil subs since October 3rd, and estimated they would be at 230-260 mil subscribers by 2024, both numbers were significantly above expectations. I think it is HBOM’s turn to show big numbers in the coming months. *consensus estimates from yahoo finance
This write-up leads to the obvious question, what about T’s other divisions that comprise around 80%+/- of T’s current revenues and EPS stream? I am not going to write about any of the other divisions in detail in this report, due to the timely nature of my thesis, and because I generally hold a consensus view of the remaining division, with a significantly positive bias. T is a large company that currently derives the majority of its earnings from the cellular division, and to a lesser extent the fiber and satellite businesses. I expect T (excluding HBOM) to post revenue growth 1-1.5% slower than the cellular industry, and mid-single digit EPS growth. The reason I have a positive bias for these divisions is because I think there is a good chance that the roll-out of 5G services may cause a significant positive inflection in the cellular industry growth rate. The market may be underestimation the magnitude of new devices brought onto the cellular infrastructure as a result of all the additional capabilities that 5G will bring, such as the Internet of Things (IOT).
Catalysts: 1) T reporting blow-out HBOM numbers and raising expectations for the unit before or during their 4Q EPS results expected 1/27/21; 2) Investor begin to focus on value names with high dividend yields; 3) The potential for 5G to drive cellular subscriptions above consensus due to IOT applications.
Risks: If I am wrong about accelerated adoption for HBOM. If there is weakness below expectations in the remaining T businesses.
Disclosure: At the time of publishing this report T is among the largest positions in my portfolio. I always put my money where my mouth is. 


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


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