AT&T Is in a World of Hurt

The world of technology is filled with boneheaded quotes. Take the following infamous quips from key tech figures, for example:

“There is no reason for any individual to have a computer in his home.” — Ken Olsen, co-founder of Digital Equipment Corp.

“640K [bytes of memory] ought to be enough for anybody.” — Bill Gates, founder of Microsoft Corp.

“I think there is a worldwide market for maybe five computers.” — IBM President Thomas J. Watson.

Granted, these quotes come from the early days of tech … back when the personal computer itself was a disruptive technology poised to change the world forever.

We are on the verge of another disruption in technology. The advent of online streaming entertainment is set to rock the cable/satellite TV business to its core.

You would think that technology companies would have learned their lessons by now. Such is not the case. Once again, we find similarly short-sighted statements from technology companies clinging to the status quo.

Today’s quote (or rather paraphrasing) comes from AT&T Inc. (NYSE: T) CFO John Stephens. During AT&T’s third-quarter conference call to investors, Stephens implied that while there were signs of cord-cutting during the quarter, those pressures would lessen in the fourth quarter. The statement prompted the following headline from “AT&T Exec Says Cord-Cutting Will Ease Soon (Right…).”

In fact, Stephens reiterated AT&T’s company line from September when it first warned about subscriber losses. He blamed it on the weather.

A Storm Is Coming

Don’t get me wrong. Seasonal issues and hurricanes can have a real impact on subscriber numbers. But AT&T didn’t only lose 90,000 subscribers due to natural disasters. It lost 390,000 traditional pay-TV subscribers in total.

Those 300,000 subscribers that AT&T didn’t talk about signed up for the company’s DirecTV Now online streaming service. So, while the company only technically lost 90,000 subscribers, it lost a great deal of revenue from customers cutting the cord with their traditional service and going with a cheaper online option.

As I’ve pointed out before, online streaming is only gaining momentum, and will eventually outpace traditional cable-TV services in both subscribers and revenue.

Because of this, AT&T is in a world of hurt, and it’s already showing in the company’s earnings report. Revenue was down more than expected in the third quarter, falling 3% to $39.67 billion.

While the company may indeed see a bump in the fourth quarter, likely due to the holiday season, expect things to get worse heading into 2018 for AT&T’s traditional pay-TV services.

One More Thing…

If pay-TV subscribers were AT&T’s only issue, it might not be in too much trouble. But the company’s other major moneymaker, wireless, is losing ground as well. AT&T reported 900,000 fewer cellphone upgrades in the latest quarter.

The blame fell squarely on Apple. Industry analysts believe that customers are putting off upgrades until Apple’s iPhone X launches. Furthermore, AT&T lost 97,000 monthly wireless subscribers.

It’s another situation that is only going to get worse … especially with companies like T-Mobile offering free Netflix with its unlimited data family plans. At this point, the Time Warner merger will only help AT&T play catch-up. And only for so long, as Sprint and T-Mobile are once again entertaining a merger.

All in all, this places AT&T far behind the game, and on the hook for an expensive Time Warner buyout.

Investing in AT&T

As a result of AT&T’s third-quarter earnings report, T stock is trading down sharply and is hovering just above two-year lows. Furthermore, the shares remain mired in bear-market territory beneath both their 50- and 200-day moving averages, and this post-earnings plunge has just dug an even deeper hole to climb out of.

That said, shorting AT&T right now would not be a great idea. The shares are trading in oversold territory, and Wall Street analysts are sure to emerge to defend the stock in the weeks to come. A short-term bounce is certainly not out of the question.

If you are looking to short T stock, wait for the shares to retest either their 50- or 200-day trendlines. Even positive news on the Time Warner front would have a hard time pushing T shares north of these moving averages at this point.

Until next time, good trading!

Joseph Hargett
Assistant Managing Editor, Banyan Hill Publishing

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