Can AT&T Pull Off Its Strategy To Gain Significant Upside?

• AT&T Inc. T shares have lost 3 percent year-to-date, while the trading has been range-bound, with a 52-week range of $30.97 - $36.45.
• Macquarie’s Kevin Smithen maintained an Outperform rating for the company, with a price target of $39.
• While expressing optimism regarding AT&T’s broadband connectivity plans, Smithen added that there could be significant upside if the company is able to pull it off.

AT&T’s shares dipped after the company gave “ambiguous” headline financial guidance at its Analyst Day in Dallas. Analyst Kevin Smithen pointed out, however, that the company’s Senior Management “was able to articulate a clear and powerful vision for the first integrated telecom provider in the US.”

AT&T has achieved 100,000 percent growth in wireless network data traffic from 2007-2014 and generated 100 percent y//y growth in video traffic on its wireless network. Smithen termed the company’s network as “ubiquitous and invisible.”

Other providers, such as Verizon Communications Inc. VZ, are focused on a more asset-lite model that is driven by content and advertising. On the other hand, AT&T is “embracing its heritage as a networking company, while incorporating software into its network and consumer interfaces,” Smithen wrote.

In the report Macquarie noted, “We think T’s first-to-market combination of local and long-haul fiber, data centers and a nationwide LTE network could give it an advantage over VZ and CMCSA [Comcast Corporation CMCSA] in the mkt for mobile video services.”

Saying that there could be significant upside if AT&T is able to “pull it off,” Smithen added that the real challenge is in being able to complete the SDN network and fiber expansion as well as record huge cost savings and service provisioning advantages before there is any material erosion of the company’s DTV sub base.

“We feel that investors should think of T as an EBITDA & FCF story because skinny video bundles will adversely impact revenue but not profitability,” the report added.