Why AT&T Will Never Be Great Again

Earns AT&T
Matt Rourke/AP

The proposed combination of Sprint (S) and T-Mobile (TMUS) came undone on Wednesday, sending shares of both wireless carriers plummeting. Sprint's board decided that regulators weren't going to approve the proposed $32 billion purchase of its smaller rival -- a play that would have given market leaders Verizon (VZ) and AT&T (T) a run for their cellular dominance. AT&T's been there. Antitrust regulators killed its similar plan to snap up T-Mobile two years ago.

It's clear that regulators don't want too much power dividend between too few wireless providers. That's good news for you as a consumer. It keeps pricing honest and competitive. However, this week's botched deal is bad news for Sprint. It's coming off of its first profitable quarter in several years, but it also needed T-Mobile's subscriber base to help it justify the costly update of its network's connectivity.

Sprint will be fine, but it's going to be a lot harder for it to catch up to Verizon and AT&T now. This would seem to be good news for the two larger players, but it's not. Instead of having to contend with one mega-rival in Sprint and T-Mobile, AT&T and Verizon will have to keep defending themselves against hungrier rivals offering cheaper data plans.

Reach Out and Touch More Someones

AT&T isn't growing as quickly as one might expect given the smartphone and connectivity boom. Total revenue in its latest quarter inched a mere 1.6 percent higher to hit $32.6 billion. Modest gains on the wireless and U-verse fronts were offset by its fading landline operations and problematic declines in its business services. It's not pretty when you can't keep up with inflation.

The news gets worse on the bottom line. AT&T's margins declined as expenses ballooned. Adjusted earnings fell to $0.62 a share after posting a profit of 67 cents a share a year earlier. After several quarters of beating analyst expectations, AT&T missed on the bottom line.

Wall Street's getting concerned about AT&T's bottom line. Three months ago analysts were banking on the company earning $2.70 a share this year and $2.84 come 2015. Now they're willing to settle for just $2.62 a share in 2014 and $2.72 a share come next year.

Rethink Possible

AT&T will always be a collection of many moving parts. On the smartphone front, it's trying to wean customers off of subsidized smartphones and unlimited data plans by pushing its AT&T Next plan, where subscribers pay for the devices in monthly installment and Mobile Share plans where families share a buck of data. It's been somewhat successful in the shift. Half of the devices activated and accounts upgraded in its latest quarter were part of the AT&T Next offering, and 56 percent of its postpaid subscriber accounts are now on Mobile Share data plans. These aren't bad moves, but it does make it more vulnerable to smaller carriers offering better deals on arguably inferior networks.

As for U-verse, this is a growing business for AT&T in terms of both television and broadband, but we can't escape the frustration of TV viewers that are tiring of bundled cable packages loaded with channels that they just don't watch. U-verse is growing at the expense of pricier providers, but the growing popularity of streaming entertainment will hurt U-verse more on the TV end than it helps on the broadband end.

There's no point in even discussing the telco titan's original wireline business. Folks are ditching their landlines in favor of smartphones.

Big Hangups

In sum, it would seem as if AT&T is the perfect communications provider. If folks don't want landlines, it sells them smartphones. If folks don't want to pay for TV, it sells them broadband. However, as even more fearless companies like Google (GOOG) push their own speedy fiber-backed networks with dreams of eventually canvassing the country with connectivity, is any telecommunications provider a smart investment? AT&T's juicy 5.2 percent yield is nice, but that won't be sustainable if the carrier needs to continue to invest big money just to sustain its pedestrian top-line growth.

The world is changing. AT&T may not be getting the Sprint-T-Mobile combo as a huge competitor, but the future holds even greater challenges and question marks.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares). Try any Motley Fool investing newsletter services free for 30 days.