What's Going On With AT&T?

For more than three years, I have been a strong supporter of owning AT&T stock. While it has not delivered the rapid gains seen in some tech or AI stocks, it has provided a solid total return of about 70%. What makes AT&T especially appealing is the steady income it generates, with a dividend yield close to 4%, offering a reliable source of cash flow for investors.

Yet, over the past 90 days, AT&T’s stock price has fallen by nearly 19%. This sudden drop raises an important question: what is going on with AT&T?

The Recent Stock Drop and Its Possible Causes

The timing of the stock decline coincides with the Initial Public Offering (IPO) of SpaceX. SpaceX owns Starlink, a satellite internet service that directly competes with AT&T’s wireless and broadband offerings. With Starlink and SpaceX now publicly traded, it gains easier access to capital from Wall Street investors. This development has sparked fears that Starlink could aggressively challenge AT&T’s market share and squeeze its profits.

Another factor adding pressure is the rise in interest rates. AT&T carries a substantial debt load of approximately $150 billion. As some of this debt matures, the company must refinance it at higher interest rates, which increases its interest expenses and reduces cash flow. This effect is gradual but noticeable and has contributed to a roughly 15% decline in AT&T’s share price over the past year.

Lastly, AT&T’s longtime Chief Financial Officer, Pascal Desroches, recently retired. Jennifer Biry has stepped in as the new CFO. While leadership changes can sometimes unsettle investors, this transition appears to be the least concerning factor and likely had minimal impact on the stock’s recent movement.

How Serious Is the Competition From Starlink?

To understand the real threat Starlink poses, it helps to compare the two companies:

• Age and Experience

AT&T was founded in 1877 and has nearly 150 years of experience in telecommunications. Starlink, by contrast, was launched 11 years ago.

• Customer Base

AT&T serves about 255 million active wireless customers. Starlink has around 12 million users. This means AT&T is roughly 20 times larger in terms of customer count.

• Revenue

AT&T generates approximately $126 billion in annual revenue. Starlink’s revenue is about $13 billion, making AT&T nearly 10x the size of Starlink in terms of annual revenue.

Starlink’s technology is impressive, with advanced satellite networks providing internet access in remote areas. However, AT&T also invests heavily in its own satellite and wireless infrastructure. The key difference lies in growth rates: AT&T’s revenue grows slowly, around 3% per year, reflecting its mature market position. Starlink, as a newer company, is growing revenue much faster at approximately 40%, which worries investors about future competition.

What This Means for Investors

The combination of SpaceX's IPO and rising interest rates explains much of the recent volatility in AT&T’s stock. The market is pricing in the risk that Starlink’s growth could eat into AT&T’s profits over time. Meanwhile, higher interest costs reduce the company’s free cash flow, which could pressure dividends or limit investment in growth.

Despite these challenges, AT&T remains the giant in the telecom industry with a vast customer base and steady revenue. Its dividend yield remains attractive for income-focused investors. The CFO change is unlikely to disrupt operations or strategy significantly.

For investors, the key questions are:

• How much market share will Starlink realistically take from AT&T?

• Can AT&T adapt and innovate to maintain its position?

• Will rising interest rates continue to pressure the company’s finances?

  
  

Looking Ahead

AT&T must balance managing its debt with investing in new technologies to compete with Starlink and other emerging players. The company’s size and experience give it many advantages, but it cannot afford complacency.

While Starlink is completely a space-based platform, AT&T offers unparallel land-based fiber services used in nearly every business around the world, particularly in America. There is no alternative to fiber cabling, with a bandwidth up to 5Gbs offered at AT&T.

Starlink maxes out at just 400Mbps or roughly 11x less throughput than AT&T. While adequate for a typical home user, the bandwidth is mostly inadequate for a business of nearly any size. In order to substantially increase that bandwidth, Starlink would require all new satellites, and their satellite architecture is a "mesh" in nature, meaning they operate many satellites, each covering a smaller area. Physical upgrades are therefore more costly.

Starlink does have an advantage being based entirely in space, versus using telecom towers. Starlink is effectively available anywhere on the planet, whereas with AT&T I have to be near a tower. But since AT&T has towers in all major populated areas, Starlink makes sense mostly to rural customers, or those customers with poor land-based services.

For those holding AT&T stock, the recent drop may feel unsettling. Yet, the company’s fundamentals remain strong, and the dividend provides a solid reliable cushion. Watching how AT&T responds to this new competition, and the interest rate environment will be important in the coming months.

Overall, though, Starlink is still a niche market of mostly rural customers, aviation and maritime customers, RV users, and technology enthusiasts. In other words, customers that are the most expensive for AT&T to serve.

In order for Starlink to move aggressively into AT&Ts core markets, Starlink would need to update all of their satellites to support higher bandwidth and offer land-based fiber options, and doing that is very expensive, an investment AT&T has already made and continues to improve.

While we should continue to watch Starlink as a competitive threat, it is in no way an immediate threat to AT&T's cash flow. Therefore, I view the recent 19% pullback in AT&T's stock price as a golden buying opportunity for a solid dividend-paying company that has fully proven itself for over 150 years! And at a price that is just 8x earnings, in this market it doesn't get much cheaper than that!

As always, staying informed about industry developments will help you make better decisions.