AT&T

Shares of US wireless carriers and tower firms traded lower after SpaceX claimed that it will use satellite dishes to build a wireless network capable of competing in the US wireless industry. SpaceX also claimed that it will launch 10 times as many V3 broadband satellites as V2.

Why it matters: SpaceX's potential impact on telecom is a key factor in valuations across the industry. We don't believe the firm's comments this quarter change the range of potential outcomes for the industry relative to our prior expectations. Several firms have attempted to build hotspot-type wireless networks like the one SpaceX is contemplating. The cable companies have incorporated public hotspots in tens of millions of broadband modems over the past decade, but these networks still deliver fundamentally limited signal coverage. We view SpaceX's comments as part of its battle with the US wireless carriers for network access rather than a credible threat. To fill areas satellites don't reach well without this access, SpaceX would likely need to build and manage a massive number of sites, just to attack a market that is well served today and not growing rapidly.

The bottom line: We maintain our fair value estimates and moat ratings for the US telecom and tower firms. Both wireless and broadband markets benefit from efficient scale attributes, but this moat source is most at risk in broadband. We recently cut our Comcast and Charter valuations, in part to reflect incremental Starlink competition. We don't expect Starlink to threaten the wireless operations of T-Mobile, Verizon, or AT&T for the foreseeable future. For US tower firms American Tower, Crown Castle, and SBA, we believe SpaceX offers more upside potential than downside risk. We don't factor upside from a SpaceX network buildout into our valuations, but the company would likely need tower sites to provide reliable signal coverage if it chooses to enter the wireless market.

Our $27 fair value estimate assumes that AT&T will deliver modest revenue growth and gradually expand margins over the next several years. The firm should benefit as its wireless and fiber network investments pay off, including efforts to retire its legacy copper phone network. Our fair value estimate implies an enterprise value of about 7 times our 2026 EBITDA estimate and a free cash flow yield of about 8% based on 2025 results, after deducting payments to minority interests.

In wireless, we expect AT&T to gain market share slowly over the next few years. We believe postpaid revenue per phone customer will grow modestly in a relatively stable competitive environment. However, the recent spurt of competitive intensity since the end of 2024 has made us increasingly cautious with our pricing assumptions. The second quarter of 2026 provided some evidence that competitive intensity is easing, but metrics like customer churn remain worrisome. We assume that average revenue per postpaid wireless phone customer remains below $60 per month in 2029, growing less than 2% annually.

In total, we expect wireless service revenue to increase a bit less than 3% annually on average through 2030, in line with the medium-term targets management has provided. We expect wireless EBITDA margins to hold in the low 40s, as cost-efficiency efforts and benefits from slowing customer growth offset rising network operating costs.

We expect the consumer broadband business to deliver steadily improving growth as the fiber network buildout matures. We believe this business has an opportunity to sharply increase margins over the next five years as penetration rates rise and the old copper network is decommissioned. AT&T plans to shut down a large portion of the copper network in 2027 and most of the remainder by 2029.

We expect the enterprise services business, including both legacy and "advanced" service, to struggle to return to growth over the next several years. We suspect that a large portion of the enterprise business will resemble the consumer fixed-line business in the longer term, primarily providing basic connectivity and earning attractive margins. AT&T should also benefit as fixed-line and wireless services converge, providing opportunities to create, deliver, and manage more complex offerings.

In total, we believe consolidated revenue can grow 2%-3% annually over the next five years, with gradual acceleration in services revenue growth over this period. With stable wireless margins and an opportunity to improve consumer fixed-line profitability, we expect consolidated EBITDA to grow faster than revenue, at about 4%.

We generally expect AT&T will be able to maintain capital spending near current levels over the next several years. Capital spending should come down a bit as midband spectrum deployment and wireless network modernization wrap up. We also expect fiber network construction to peak over the next couple of years as the most economically attractive areas are built. Offsetting these benefits, we expect the need for continued network capacity additions and the availability of new technology will limit how much AT&T can cut spending. We assume capital spending will fall a bit below management’s $23 billion-$24 billion budget over the next three years, averaging about $22.6 billion, including vendor financing payments, through 2028.

We give AT&T a Narrow Morningstar Economic Moat Rating. Wireless is AT&T's most important business. Returns on capital in wireless have eroded in recent years as the company has spent heavily on wireless spectrum and put that spectrum to use. We estimate the wireless business produced a return on capital above 9% in 2025, down from about 10% in 2018, but still modestly higher than our estimate of the company's cost of capital. Over those seven years, segment operating income increased 25% cumulatively while the invested capital base expanded more than 30%, primarily on $40 billion of spectrum purchases. With the acquisition of spectrum from EchoStar, the wireless invested capital base will again expand by about 10% in 2026, diluting the segment return on capital about 1 percentage point, absent any increase in profitability.

We expect that wireless returns will remain ahead of AT&T’s cost of capital. Verizon, AT&T, and T-Mobile dominate the US wireless market, collectively claiming about 90% of retail postpaid and prepaid phone customers and supplying the network capacity to support most other players. Providing solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base requires incremental investment in network capacity, a significant portion of costs is either fixed or more efficiently absorbed as network utilization reaches optimal levels across more locations.

The benefits of fixed-cost leverage and the difficulty of providing a differentiated wireless offering create an efficient scale advantage in the wireless industry. The consolidation across the industry over the past 15 years and the inability of several interested parties, including EchoStar and Comcast, to enter the market using their own networks provides evidence of efficient scale. Comcast primarily relies on Verizon to support its wireless efforts. EchoStar recently abandoned its wireless network plans after more than a decade of effort and has begun selling off its spectrum portfolio.

With three sizable players, we don’t believe the carriers have an incentive to aggressively poach each other’s customers, given how slowly market share shifts occur. Each of the three major carriers has pledged substantial capital returns to shareholders: AT&T’s dividend totals $8 billion annually, and Verizon’s is $11 billion. T-Mobile has said it will deliver $50 billion to shareholders from 2025 through 2027. To support these returns, each of the carriers has guided investors to expect modest but steady revenue growth over the next several years.

We also appreciate AT&T management's recent comments regarding the cost of wireless spectrum. The firm believes that each of the three carriers now has the spectrum needed to compete, limiting the motivation to seek additional licenses at any cost. AT&T expects each carrier to target specific new licenses rather than seek large blocks of nationwide spectrum. However, we still expect the carriers to invest regularly in new licenses, and the threat of new entrants like the cable companies or SpaceX could drive prices beyond rational levels.

Satellite technology could advance to threaten the wireless business, but we believe that is unlikely for the foreseeable future. Terrestrial networks like AT&T's employ large spectrum blocks across a variety of frequencies on dense infrastructure in urban and suburban areas to provide reliable coverage and capacity, both indoors and out. With limited spectrum available and the inability to reuse spectrum across geographies to the same extent as a terrestrial network, we expect satellite service quality to fall short of customer expectations.

Fixed-line enterprise services is AT&T’s next-largest segment. We don't believe this operation has a moat, as technological changes and shifting customer preferences have persistently pressured revenue. Business services revenue was only $17 billion in 2025, down from $32 billion a decade ago. Cost-cutting has failed to offset lost revenue, leaving the segment operating margin below breakeven recently. AT&T is doing more to focus exclusively on customers served predominantly with its own networks, including wireless services, but this transition has a long way to go.

AT&T’s last significant business, consumer fixed-line services, doesn’t possess a moat, in our view, but it is improving its position. We estimate AT&T’s consumer fixed-line networks reach around 60 million homes, or 35%-40% of the US population. This business is challenged competitively across much of this footprint thanks to inferior networks relative to cable competitors. However, AT&T has upgraded more than half of its residential footprint to a fiber-to-the-premises network, which provides a much stronger competitive position versus cable.

Earning a strong return on fiber investment is difficult, but we expect price competition to remain rational as AT&T’s fiber network grows. If rational, neither AT&T nor the cable companies is likely to risk earning less revenue across their existing customer bases over the long term to gain share. Still, we believe AT&T will need several years of customer growth and price increases to earn an attractive return in this business, even with the benefits service bundling provides to the wireless segment. The cable companies have gotten more aggressive recently in an attempt to retain customers. We see a risk that price discounting accelerates if the cable companies are unable to trim customer losses.

Following a period of investment, AT&T will hold a nationwide 5G wireless network with deep spectrum behind it and a fiber network capable of reaching around half of the US population. No carrier can match these assets.

AT&T has the scale to remain a strong wireless competitor. With three dominant carriers, industry pricing should be rational over the long term.

Combining wireless and fixed-line networks with new technologies and deep expertise makes AT&T a force in enterprise services, where new use cases around AI are poised to emerge.

The cost of maintaining dominance in the wireless industry by controlling spectrum has been costly. AT&T has spent more than $60 billion since 2020 on licenses with few prospects for incremental growth.

Advancing technologies like satellite will eventually swamp AT&T’s business, enabling a host of firms to enter the market, further commoditizing wireless and broadband service.

AT&T’s debt load will catch up with it. The firm carries far higher leverage than it has historically, and its dividend payout remains high. Prematurely buying back shares will further hamper the balance sheet.