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 TheStreet.com: “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!
Assistant Managing Editor, Banyan Hill Publishing