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AT&T (T) Halves HBO Max Subscription Price to Woo Back Customers

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Over the past few months, AT&T Inc. (T - Free Report) has taken several strategic decisions to focus more on its customer-centric business model. One of these included the decision to phase out HBO and HBO Max subscriptions through Amazon Prime Video Channels of Amazon.com, Inc. (AMZN - Free Report) , as it aimed to develop direct-to-consumer relationships. As HBO subscriptions officially went off the air from Amazon Prime on Sep 15, AT&T apparently lost about 5 million U.S. subscribers who had signed through Amazon. The company is now aiming to woo back these customers and attract newer ones as well through a discounted price offering as the streaming wars heat up.

HBO Max subscription was originally priced at $14.99 per month. AT&T is presently offering this streaming service at $7.49 per month for six months in a limited promotional deal till Sep 26. The disruptive pricing is lower than the Prime video membership of $8.99 per month, plus taxes and is likely to be a lucrative offer for both existing and new customers. The offer, however, is available to only U.S. customers as AT&T expects to register healthy growth in HBO Max subscribers in international markets. The company is likely to launch HBO Max in six European countries next month and follow it up with additional launches in 14 other countries in Europe in 2022. With solid demand trends due to an uptick in pandemic-induced nesting activities — games, streaming video, and home fitness, the company expects to achieve 70-73 million global HBO Max and HBO subscribers by the end of 2021.

AT&T expects the merger of its WarnerMedia assets with Discovery, Inc. (DISCA - Free Report) to be completed by mid-2022. The transaction aims to spin off the carrier’s media assets and merge them with the complementary assets of Discovery. Post completion of the deal, AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity, while Discovery will own the remainder. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses. The separation of the media assets is likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy. Moreover, a focused entertainment company is likely to be better placed to capitalize on the booming direct-to-consumer (DTC) streaming services market and unlock value from media assets. This, in turn, could help it to reinvest in the new entity for more content and digital innovation in order to scale the global DTC business. The transaction is expected to generate cost synergies of $3 billion per year resulting from technology, marketing, and platform savings with the consolidation of DTC capabilities and the elimination of duplicate initiatives.

Post completion of the deal, AT&T expects revenues to witness a CAGR of low single digits from 2022 to 2024, with adjusted EBITDA and adjusted earnings per share recording a CAGR of mid-single digits. The company further expects annual dividends in the range of $8-$9 billion, reflecting a payout ratio of 40% to 43% on a projected free cash flow of more than $20 billion in 2023.  

The stock has lost 3.8% in the past year compared with the industry’s decline of 3%.
 

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Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. A better-ranked stock in the broader industry is Qualcomm Incorporated (QCOM - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Qualcomm has a long-term earnings growth expectation of 21%. It delivered an earnings surprise of 13.5%, on average, in the trailing four quarters.


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