The Best Connected Car Company Is... AT&T?

About: AT&T Inc. (T)
by: James Brumley

The telecom giant hasn't touted its role in the burgeoning market's technology.

AT&T already has a large network of partner automobile makers.

A strong presence in this market can be leveraged in other ways, like IoT.

Last week, International Business Machines (NYSE:IBM) and BMW jointly announced they were getting into the so-called "connected car" business. The technology giant will be providing the necessary cloud-based services to support the in-car interface that will make the carmaker's automobiles that much more marketable.

It was not only a feather in BMW's cap but also some much-needed positive publicity for IBM... a giant name that's quickly becoming obsolete. Perhaps more than anything though, the team-up underscores a movement that's getting serious traction now. What's interesting about the advent of connected cars, however, is what company is actually leading the race. It's a name that's quietly sitting right under our noses that needs a growth engine of its own.

That company? AT&T (NYSE:T).

A Big-Time Connected Car Player

A handful of investors may already fully recognize just how deep into the connected car business. For everybody else...

The journey actually began in earnest two years ago. For the second quarter of that year, the telecom outfit garnered 2.1 million (net) new customers. What's curious about the figure is that one million of those new customers weren't cell phone customers, but rather, drivers looking to connect their properly-equipped vehicles to cell towers that would keep their automobiles digitally connected to the outside world.

And that was before AT&T waded all the way into the connected car business. It's now one of the biggest players in the business, trailing only Cisco Jasper, and now connected cars make up the lion's share of the carrier's new cellular connections.

Oh, and at one point last year AT&T was adding more car-connection accounts than the rest of the wireless industry combined. That's how it worked its way up to 10.54 million connected car accounts as of the third quarter of 2016.

The centerpiece of the company's efforts on this front has since become its V2X (or vehicle-to-anything) platform. Not only does the technology connect passengers with communications towers the same way they could access digital web content via their smartphones, but also allows V2X automobiles to communicate with one another as well as communicate with their surroundings. The overarching benefit is safety, but geo-locating technology built into such systems also allows car owners to find repair garages, provide maps, and more.

And V2X isn't simply an ambition. The technology was touted in January at the AT&T Developer Summit, which was held in conjunction with this year's CES. Delphi Automotive (NYSE:DLPH) and Ford Motor Company (NYSE:F) are already working on integration solutions, and Honda Motor (NYSE:HMC) has inked a long-term deal to add the technology to its Canadian and U.S. vehicles. All told, AT&T is working with roughly a couple dozen carmakers.

The telecom giant is well equipped to hold onto its leadership standing too in that it's blazing the trail into the world of 5G connectivity.

Seeking Alpha's Bob O'Donnell laid out the pros and cons of 5G - more pros than cons - in February. He also accurately pointed out the rise of 5G would be messy, and not likely materialize the way many suspect it will. It is coming though. Dividend Sensei laid out some compelling 5G growth metrics in April.

In that vein, last month, AT&T joined the 5G Automotive Association, or 5GAA, signaling its plans to take a seat at the leadership table as 5G becomes the norm for wireless communications. It's ideally suited, and necessary, as the connected cars are always connected, and communicating. 5G facilitates the heavy data load that 4G connectivity can't always accommodate.

Better for AT&T to assume a role as a shaper of the technology than not.

Growth Opportunity

As for what's at stake, the numbers vary from one prognosis to the next... albeit for good reason - nobody really knows what the future holds. Still, all the outlooks bode well.

As an example, Juniper Research recently opined that revenues facilitated by connected car platforms will swell from $18.4 billion in 2017 to $42.9 billion by 2022. That's not the spend on the hardware needed to power connected cars, and it's not clear of that figure includes the monthly subscriber-connection fee... usually around $20. But, with as much as $42.9 billion on the table by 2022 and perhaps as much as $100 billion by then - the upper end of Juniper's outlook - the demand for the technology will materialize.

From another perspective, last year, Gartner opined that the number of connected cars would swell from 12.4 million in 2016 to 61 million by 2020.

It all points to some much-needed potential for the company which has otherwise struggled with a saturated cell phone market and similarly saturated cable television market... a market that's now shrinking as the over-the-top-television industry expands. AT&T has a play in that market too, leveraging its acquisition of DirecTV to launch its over-the-top TV package called DirecTV Now in October. At a price of only $10 per month for some select wireless "Unlimited" customers though, at the same time a more robust service from Netflix (NASDAQ:NFLX) sells for about the same, it's a stretch to say DirecTV is going to be a growth engine.

The impending union with Time Warner (NYSE:TWX) also could boost the top and bottom line, but it won't be cheap. AT&T's offer of $85.4 billion was 22 times last year's income for Time Warner, and that was a pretty good year.

At least with being a pace setter in the connected car movement and able to develop much of the technology in-house, AT&T has a platform that can generate some real revenue growth, even if it's not immediate growth.

Bottom Line

It's difficult to call the rise of connected cars a reason to buy AT& shares. It certainly doesn't hurt the bullish case, but the future of connected car technologies is still relatively obscured.

On the other hand, the fact that AT&T is one of the silent leaders of what most observers expect to be a massive opportunity is difficult to overlook, especially knowing that many of the technologies it developed in-house could be easily repurposed to give the telecom company a toehold in the much bigger and much broader Internet of Things industry.

As AT&T's senior vice president of business customer experience and strategy Steve Hodges recently put it:

It just goes on and on and on. You look at the billions of devices that are being predicted to be on the networks-now, granted they're relatively lower use, but hey, it's all revenue; it doesn't tax your network. It's just a fascinating world to get into...

...We predict good revenue growth, but it has another secondary benefit beyond standalone benefits. If you're a leader in IoT, it will actually have a pretty large pull-through, in my opinion, to your core businesses. Because once you bring that into your core operational model, it creates new levels of conversation with your customers that you may not have had before, talking about new applications, how you can help them be more productive. Now you're in a very consultative kind of world in a way that they're not as familiar with as you are.

That may be the most exciting thing AT&T, outside of acquisitions, has had to talk about in a while.

For now, it's just an idea to keep on your radar... perhaps ready to promote it to a full-blown position when it becomes clear the connected car market is on the verge of an explosion.

Disclosure: I am/we are long T. 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.