The U.S. telecom market is saturated, given that 97% of Americans own a mobile phone. As two titans of the industry, AT&T (NYSE:T) and Verizon (NYSE:VZ) are battling for this finite pool of customers.
The customer stakes are even higher when you add T-Mobile (NASDAQ:TMUS) to the mix. T-Mobile is a formidable competitor, further strengthened after its merger with Sprint last year, and it's firing on all cylinders.
Despite the challenges, AT&T and Verizon enjoyed solid results in the first quarter of 2021. Each has taken a different approach to achieve success. Let's dig into both to assess if one is a better investment.
AT&T's path to success
AT&T has sought to create an ecosystem of phone, entertainment, and internet services to attract and retain customers. It acquired DIRECTV and Time Warner as part of that gambit.
But DIRECTV experienced ongoing subscriber losses in the face of consumers switching to streaming video services. Time Warner, now named WarnerMedia, struggled when the coronavirus pandemic hit as movie theaters shuttered and advertising spend declined.
AT&T brought on new CEO John Stankey last year to deliver much-needed change. Under his leadership, AT&T announced a DIRECTV spinoff.
Also under Stankey, AT&T made the controversial decision to release WarnerMedia's 2021 theatrical film slate onto HBO Max, the company's new streaming service, at the same time as in theaters. The telco's first-quarter earnings represent initial insight into how this experiment is faring.
So far, Stankey's gambit is paying off. HBO Max saw about a 35% boost in Q1 subscription revenue as the streaming service helped WarnerMedia grow year-over-year revenue by nearly 10%.
These results powered AT&T to first-quarter revenue of $43.9 billion, a 2.7% increase over the prior year. That's just the start of a strong first quarter.
In an industry where customer retention is critical, AT&T experienced low churn in Q1. Telecom companies value postpaid customers more than prepaid, but AT&T did well on both fronts. Postpaid phone churn remained at 0.76%, maintaining one of AT&T's lowest churn rates in company history. Prepaid churn was less than 3%, a record low.
On the customer acquisition front, AT&T experienced 823,000 postpaid net adds, substantially higher than the prior year's 27,000. AT&T also enjoyed a whopping 45% year-over-year jump in equipment sales to $5 billion.
Verizon also had a solid first quarter. Revenue was up 4% year over year to $32.9 billion. The company generated free cash flow of $5.2 billion in Q1, a 44% improvement from 2020's $3.6 billion.
This means its dividend is secure. Verizon has increased its dividend for 14 consecutive years, even amid the pandemic.
Unlike AT&T's foray into entertainment, Verizon is strictly focused on telecommunications. It owns some famous web properties, such as Yahoo!, under its Verizon Media division, but that segment only contributed about 6% to Q1 revenue. And the company may soon sell Verizon Media's assets.
Verizon expects multi-year revenue growth from its 5G deployment. The company anticipates the bulk of that growth coming from its wireless service and other revenue, which excludes equipment sales.
This year, Verizon estimates service and other revenue growth of at least 2%. As the company's 5G deployment expands, Verizon forecasts this revenue to rise to 4% by 2024.
Equipment sales will provide another revenue driver as customers adopt 5G-supported devices. Verizon predicts 55% or more of its postpaid customer base will own 5G-enabled phones by the end of 2023. Its Q1 equipment revenue saw a 24% year-over-year increase to $4.2 billion.
However, Verizon suffered postpaid net losses of 170,000 in Q1. It's not uncommon to lose customers at the start of the year, but the company only lost 50,000 in 2020.
Which is better?
Both AT&T and Verizon has the potential to see years of steady earnings growth as customers upgrade to 5G devices and plans. Add their attractive dividends to the mix, and both telecom stocks possess compelling qualities.
It's a tough call, but after its excellent first quarter, the edge goes to AT&T. Its Q1 subscriber gains were strong, marking a third consecutive quarter of postpaid net adds while churn remained low. These are key factors to success in this competitive industry.
Q1 also revealed signs WarnerMedia is starting to bounce back from the pandemic's impact, and AT&T may finally be emerging from 2020's financial challenges. This makes AT&T the more compelling investment right now.