AT&T's sputtering media bets are dragging the stock to its worst year since the financial crisis

Key Points
  • AT&T has diversified away from the slow-growing wireless business with its $50 billion bet on satellite distributor DirecTV in 2014 and its recent $85.4 billion acquisition of Time Warner.
  • But the company is now saddled with $250 billion in debt and faces challenges in sustaining a profitable entertainment business, thanks to a crowded media space and the trend of cord cutting.
  • Where AT&T is trading into correction territory on the year, Verizon is up almost 10 percent in the same period.
Randall Stephenson, chairman and chief executive officer of AT&T
Andrew Harrer | Bloomberg | Getty Images

AT&T's stock is having its worst year since the 2008 financial crisis, down more than 20 percent year to date, as the company's multi-billion-dollar bets struggle to take off and its wireless business faces growth challenges.

The company expanded its media distribution business in 2014 with a $50 billion purchase of satellite distributor DirecTV. AT&T doubled down on the media space earlier this year with its $85.4 billion acquisition of Time Warner.

But now, AT&T is facing $250 billion in debt and a crowded media space, with a growing number of competitor streaming services hitting the market. It is also grappling with cord cutting as people drop their satellite TV packages for cheaper options.

Moreover, it's not clear AT&T's strategy of buying media and satellite assets to boost its wireless business by allowing it to bundle more products together will pay off in the long run. Revenue in its legacy satellite and wireless businesses has grown modestly at best, sometimes even posting year-over-year declines.

AT&T is trading into correction territory on the year, but Verizon is up almost 10 percent in the same period. Practically every major Wall Street analyst has a sell or hold rating on the stock, including MoffettNathanson.

"There were a lot of people who thought AT&T was the visionary and that they were making visionary bets on the media ecosystem at a time when Verizon was caught in quicksand," Craig Moffett, an analyst at MoffettNathanson, said. "Two years later, Verizon looks to have been the far more prudent of the two."

AT&T earlier this week reported a large drop in DirecTV video subscribers for the September quarter. The division shed 359,000 customers, while its direct-to-consumer streaming play DirecTV Now added just 49,000 subscribers to compensate.

"In retrospect, they diversified away from wireless right at the bottom and diversified into satellite TV right at the top," Moffett told CNBC. "As far as timing, it could hardly have been worse."

He added, "The DirecTV business is the biggest anchor, but the company's strategy isn't helping."

AT&T beats on top line, misses on earnings per share
AT&T beats on top line, misses on earnings per share

When reached for comment by CNBC, a spokesperson for AT&T pointed to an earlier comment by CEO Randall Stephenson from Wednesday saying that he was confident in the third-quarter results and emphasizing the need to stabilize EBITDA, or earnings before interest, taxes, depreciation and amortization, in the company's broadband and TV business and in Mexico

The DirecTV deal set AT&T on a shopping spree to boost its media and advertising business, with smaller deals in addition to Time Warner. Earlier this year, it acquired Chernin Group's controlling interest in Otter Media, a joint venture between the two companies. It also bought the advertising and analytics company AppNexus.

AT&T plans to continue with its media bets. It announced this month that it will launch a streaming service to rival Netflix in late 2019. That streaming service will include HBO shows, plus other programs from the rest of WarnerMedia.

It is also adding subscribers to its DirecTV Now service. But streaming service subscribers are generally considered to be less profitable than satellite subscribers.

Moffett said the company will ease off its aggressive media and advertising strategy in lieu of cash to satisfy the bond market.

"With leverage roughly four times EBITDA, the needs of the bond market must now take priority over the needs of the equity market," the analyst said in a note published Wednesday. "This simple statement of priorities is particularly useful given the mind-numbing complexity that comes with the inclusion of Time Warner, and with AT&T's third segment reshuffling in as many years. Prioritizing the bond market means delivering cash flow … even if that means sacrificing growth."

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