Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

AT&T makes money and Loses Customers

Wireless provider AT&T (NYSE: T) appears to be a value investment because it makes a lot of money. On the other hand, AT&T is losing large numbers of subscribers.

Dramatically, AT&T admits its DirecTV satellite subscription and its U-Verse television business lost 1.2 million customers in 3rd Quarter 2019, The Los Angeles Times reports.

Furthermore, AT&T admits DirecTV service lost 946,000 subscribers in 2nd Quarter 2019, ArsTechncia reports. Additionally, AT&T confesses DirecTV lost 778,000 premium TV subscribers in the same period.

In detail, DirecTV’s subscriber numbers fell from 25.4 million in 2nd Quarter 2018 to 22.9 million in 2nd Quarter 2019. Furthermore, AT&T CFO John Stephens admits “the company expects an incremental 300,000 to 350,000 premium video losses above the previous quarter’s premium video results,” in 3rd Quarter 2019 ArsTechnica claims.

In addition, AT&T lost 34,000 broadband subscribers in 2nd Quarter 2019. AT&T’s business is shrinking before our eyes even though it bought Time Warner in 2018.

Is AT&T Making Money?

Strangely, AT&T (NYSE: T) is still making vast amounts of money. AT&T reported a gross profit of $24.434 billion on revenues of $44.588 billion on 30 September 2019.

In addition, AT&T reported an operating income of $7.901 billion and an income after tax (net income) of $3.949 billion. Thus, AT&T is making money from its operations.

However, AT&T’s revenues fell slightly from $44.957 billion in 2nd Quarter 2019 to $44.588 billion in 3rd Quarter 2019. Oddly, 3rd Quarter 2019 was the first quarter of revenue growth shrinkage at AT&T in over a year. AT&T reported revenue growth rates of -2.52% on 30 September 2019 and 15.32% on 30 June 2019.

Thus, AT&T’s revenues are shrinking. I think earlier subscriber losses did not affect AT&T’s revenues because of price of increases.

AT&T is generating less cash

Predictably, AT&T is generating far less cash. AT&T’s operating cash flow fell from $14.284 billion on 30 June 2019 to $11.389 billion on 30 September 2019.

Additionally, AT&T’s ending cash flow fell from $2.024 billion to -$1.872 billion in the same period. AT&T is generating far less cash because of the nature of its business.

I think of companies such as AT&T as float-generating machines. AT&T generates vast amounts of float by charging subscriptions for its services; TV, broadband, and wireless phones.

The customer has to pay the subscription if he wants to keep using his phone and internet and watching TV. The cash subscriptions generate what Warren Buffett calls “float.”

Correspondingly, AT&T had $6.588 billion in cash and short-term investments on 30 September 2019. However, AT&T had $8.423 billion in cash and short-term investments.

Float is a constant stream of cash management can tap for any reason. AT&T for example had plenty of cash to buy Warner Brothers, last year, because of the float.

Is Streaming Video Killing AT&T?

Generating less float because of subscriber losses could be fatal to AT&T because its business model depends on that cash flow.

DirecTV is collapsing because of the rise of streaming video. To explain, streaming video offers the same product as DirecTV; television, in a more convenient format and at a lower price.

For example, a standard DirecTV subscription cost between $49.99 and $59.99 a month on 23 December 2019. In contrast, a basic Netflix (NASDAQ: NFLX) subscription cost $8.99, a standard Netflix subscription cost $12.99, and a premium Netflix subscription cost $15.99 on the same day.

How Streaming Video is Killing DirecTV

Meanwhile, a Hulu subscription cost $5.99 with ads and $11.99 with ads. Furthermore, Amazon Prime Video cost $8.99 a month and a combined Hulu/Disney+, and ESPN subscription cost $12.99 a month on the same day.

You could subscribe to Netflix, Hulu/Disney+/ESPN, and Amazon Prime Video and pay less than with DirecTV. An unlimited DirecTV subscription cost $59.99 on 23 December 2019 while the combined cost of Amazon Prime Video, Disney+, and Netflix subscriptions was $34.97.

Incredibly, a subscription to AT&T’s option AT&T TV cost $64.99 a month on 23 December 2019. I cannot see how AT&T can compete with Netflix, Disney, and Amazon at that price.

Under those circumstances, Statista estimates Netflix had 60.62 million paid subscribers in the United States in 3rd Quarter 2019. Moreover, CNET reports Disney+ had over 10 million subscribers when it launched in November 2019. In addition, Statista estimates Hulu had 26.9 million paid subscribers in May 2029.

Finally, Statista estimates Amazon (NASDAQ: AMZN) had 50.23 million video subscribers in the United States in January 2019. That number grew from 44.99 million in January 2019. Amazon also had 105 million Prime subscribers in June 2019.

If these trends continue, DirecTV’s business could disappear in a few years. Consequently, AT&T will need a new source of revenue.

What Value does AT&T Have?

AT&T (NYSE: T) still has a lot of value including 77 million paid wireless subscribers in 2018, Statista estimates.

Notably, AT&T owns a major Hollywood film studio; Warner Brothers, DC Comics, HBO, CNN, the Turner Broadcasting System, and New Line Cinema. DC Entertainment (DC Comics), owns Batman, Superman, Wonder Woman, the Green Arrow, the Flash, the Suicide Squad, the Justice League, the Watchmen, the Teen Titans, and other iconic superheroes.

Warner Brothers owns such movie properties as the Matrix and Harry Potter and produces DC superhero movies such as Joker and Wonder Woman. New Line Cinema owns the movie and TV rights to The Lord of the Rings universe. Meanwhile, HBO owns Game of Thrones and Westworld and produces new shows such as Watchmen; a DC property.

Thus, AT&T has the raw material to launch a successful streaming video competitor to Disney. Conversely, AT&T could make money by selling programming to Amazon, Netflix, Hulu, etc.

AT&T’s Problematic Legacy

However, AT&T still has many problematic legacy properties.

For example, Turner’s cable TV networks such as TNT, TBS, CNN, Cartoon Network, Turner Classic Movies, etc., are even more vulnerable to streaming video than DirecTV. For instance, CNN’s ratings fell by 26% to 767,000 in April 2019, Forbes reports.

Thus, AT&T is a company loaded with both problems and opportunities. Its management needs to figure out how to ditch money losers such as cable TV and DirecTV while monetizing streaming video.

Is AT&T a Value Investment?

My conclusion is AT&T (NYSE: T) is cheap but not a value investment because of its exposure to satellite and cable TV.

I think Mr. Market fairly priced AT&T shares at $39.10 on 26 December 2019. Thus, AT&T is a stock for risk takers but not a value investment. To clarify, AT&T could theoretically make money from streaming video and wireless. However, it will need to ditch money-losing legacy assets first.

Interestingly, AT&T is still a decent dividend stock. In fact, credits AT&T with 34 years of dividend growth. Overall, estimates AT&T shareholders received a dividend yield of 5.4%, an annualized payout of $2.08, and a payout ratio of 58.91% on 26 December 2019.

AT&T will pay a 52₵ dividend on 9 January 2020. That dividend is 1₵ higher than the 51₵ paid on 10 September 2019. Therefore, you could make some money from AT&T stock.

If you can live with the risk, AT&T is a good dividend stock. Yet I advise investors to be ready to dump AT&T fast because its TV business could collapse soon.