After a strong rally earlier this year, the Telstra Corporation Ltd (ASX: TLS) share price has fallen 10% since the start of August. Does this present an opportunity to buy?
Telstra is our country’s oldest telecommunications business, having built the first telegraph line in 1854. In 2019, it provides more than 17 million retail mobile services, around 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services.
2019 Has Been A Wild Ride
Despite the 10% share price decline since the start of last month, Telstra shares have actually been a standout performer in 2019. Entering the year well below $3, the share price enjoyed a sustained rally to reach a peak of $4.01 in late July before delivering a somewhat disappointing FY19 result and subsequently seeing some of the gains being wiped away.
Telstra reported both falling revenue and profits for FY19 and concerns remain about just what the future holds for Telstra in a post NBN world. Management have taken actions to steady the ship via aggressive cost cutting measures, which will involve the sale of assets and thousands of people losing their jobs.
Forecasting Telstra’s future cash flow any further than 12 months out involves an enormous amount of vague guesswork at best and some might argue it’s actually an impossible task – at least with any degree of confidence.
Pinning Down A Valuation
It seems no one is really sure what Telstra’s profitability will be 3 years from now. There are so many assumptions that need to be made that can only be based on very flimsy guesswork. How do you account for the future value of Telstra’s 5G network? On what basis do you justify the wide array of assumptions you might make to calculate it?
Given that revenue will continue to decline in the near term, it may be misleading to use the current PE multiple of 19x as any indication of value. If you are unfamiliar with what the PE ratio is, check out the video below:
I can certainly entertain an argument for buying Telstra shares based on the long-term potential of its much touted 5G network. However, I believe that thesis is very unclear and its future success is far from a given. Things can and do change very rapidly within the ‘tech’ world and competition is fierce, unlike the glory days when Telstra enjoyed a near monopoly in its primary business operations.
My approach on Telstra is simply to place it in the ‘too hard basket’ and move on. With more than 2,000 shares listed on the ASX, there are plenty of opportunities out there for us investors.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
