It is a well known fact that the U.S. mobile carriers are increasingly facing the problem of limited growth in the number of subscribers, as there is hardly any one left who needs a mobile phone and doesn't have one. The situation is so drastic that the carriers are even ready to compromise their revenues to gain and more importantly retain their existing subscribers. The recent price cut announced by AT&T (NYSE:T) which led to a steep fall in the stock prices of the company, as well as the other mobile carriers (see the chart below), reflects the extent of urgency among the carriers to stay ahead of each other in luring the subscribers.
Recently, the company introduced a plan that offers the best ever value pack for families and businesses (as claimed by the company). Under the new plan, a family of four can now get unlimited talk and text, and 10GB of data for $160 a month, which is $40 lower than the company's existing offering. Any AT&T customer, including small businesses with up to 10 lines, and customers of Verizon (NYSE:VZ), Sprint (NYSE:S), T-Mobile (NASDAQ:TMUS) and other wireless carriers who switch to AT&T, can subscribe to the plan. Moreover, the offer requires no contract, and customers can also bring their own devices. As per the company, the plan is $100 cheaper than the Verizon's existing offerings.
Reacting to the new offering, David Christopher, chief marketing officer, AT&T Mobility said:
"These new plans give customers what they want - our best-ever prices on a best-in-class network. We're making it easy for families who want it all - great service, great value and big bucket of data to share."
With over 5% dividend yield, AT&T offers one of the best dividend yield among the large cap stocks. The constant increase in the dividend (see the chart below) is the key attraction of the company's stock for the investors.
However, despite such an excellent dividend yield, during the last few quarters the stock hasn't been finding investors' favor and is currently trading at its 52-week low.
The biggest thing that has been keeping investors away from the stock is that the company has been lagging behind its competitors in the net new subscriber addition. In the latest quarter, the company added 809 thousand new customers (Adjusted for M&A) under its wireless segment. The number is okay, but the company lagged behind its competitors, such as T-Mobile, which added 1.6 million subscribers in the period, and Verizon Wireless, which added a net 1.7 million retail subscribers. This shows that despite self acclaimed network superiority the company is not tapping the market to its potential. This trend is not only affecting the investors' sentiments but also the future prospectus of the company.
With the recent move, the company intends to avert this trend. However, I am of the view that the move is more likely to start an industry wide price war. It is highly unlikely that the other players will not respond to the move and allow AT&T to take away their subscribers.
I do not think that the company will be able to gain any significant number of subscribers with this price cut as the competitors will come out with their own plans and price reductions to counter any such situation. In fact, the move is more likely to hurt the revenues of the company itself. Moreover, there are plenty of other opportunities for the company to consider (discussed below) to attract customers.
For the future, I feel that instead of hurting its own revenue base by such an aggressive move, the company should look toward the other growth opportunities such as cloud, digital life (internet connected home security systems), connected car, and mobile payments. All these are big opportunities that can lead the company towards growth in long-run, and there is no reason why the company cannot gain a decent share in these fast growing markets. Moreover, its U-verse services that now accounts for 10% of the company's revenues is also doing well. The numbers of U-verse subscribers had shown an excellent growth of 33.75% (year over year) during the latest quarter.
All in all, the company's recent aggression will only hurt the future financials of the company, as well as whole industry. In fact, it will only make it harder for the company to increase its dividend in the times to come (without leveraging its balance sheet). However, this is good news for the mobile users as they may see a industry wide price war, which could lower their mobile bills (to some extent).
Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.
This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.