AT&T Likely to Sell its Digital Advertising Unit Xandr; Target Price $25 in Worst-Case

AT&T Inc, an American multinational conglomerate holding company, is in discussions to sell its digital advertising unit Xandr, the Wall Street Journal reported citing people familiar with the matter, sending its shares down over 1% on Tuesday.

“Discussions are at an early stage and may not ultimately result in a sale, which is unlikely to fetch more than the amount AT&T paid for AppNexus in 2018,” the WSJ reported.

AT&T’s consolidated revenues for the second quarter totalled $41.0 billion versus $45.0 billion in the year-ago quarter. The COVID-19 pandemic impacted revenues across all segments.

Xandr revenue climbed more than 15% last year to $2 billion.

“AT&T’s wireless growth opportunities remain impressive with the widespread launch of mobile 5G services in several cities. The inherent growth potential of the streaming services from HBO Max also bodes well,” noted analysts at Zacks Research.

“(But) AT&T continues to struggle in a competitive and saturated U.S. wireless industry, while margin pressures due to promotional offers and discounts are headwinds amid the coronavirus-induced turmoil.”

AT&T shares closed 1.14% lower at $29.47 on Friday, the stock is down about 25% so far this year.

AT&T stock forecast

Twelve analysts forecast the average price in 12 months at $34.00 with a high forecast of $38.00 and a low forecast of $25.00. The average price target represents a 15.37% increase from the last price of $29.47. From those 12 analysts, eight rated “Buy”, two rated “Hold” and two rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $36 with a high of $49 under a bull-case scenario and $26 under the worst-case scenario. Scotiabank lowered their rating to sector underperform from sector perform; cuts target price to $30 from $34.

Other equity analysts also recently updated their stock outlook. AT&T had its price target boosted by Royal Bank of Canada to $25 from $24. They currently have an outperform rating on the technology company’s stock. Zacks Investment Research downgraded shares of AT&T from a hold rating to a sell rating and set a $33.00 price objective. Guggenheim lowered their price objective to $38 from $39 and set a buy rating.

Analyst view

“Valuations near multi-year lows already reflect company and industry concerns. Return to wireless service revenue growth with Firstnet and nationwide 5G rollout in 1H20. Potential industry consolidation provides upside opportunities. A dividend payout ratio in the 60s is sustainable in the medium term, buybacks possible as deleveraging continues,” said Simon Flannery, equity analyst at Morgan Stanley.

“Our valuation reflects 5.75% 2020E dividend yield, which is a +400bps spread above the MS Strategy 4Q20 US 10-year Treasury forecast, slightly wider than the historical 5-year average,” he added.

Upside and Downside risks

Upside: 1) Four to three wireless consolidation. 2) Return to wireless service revenue growth. 3) Improving Entertainment Group trends. 4) Activist Shareholder drives change – highlighted Morgan Stanley.

Downside: 1) Increased wireless competition ends return to service revenue growth. 2) Free cash flow pressured, increasing leverage and dividend sustainability concerns. 3) Recession could pressure business wireline, advertising revenues. 4) OTT dilution and execution risks.