Could the Telstra Corporation Ltd (ASX: TLS) share price be worth buying right now? There’s a lot to think about.
What has been going on recently?
The Telstra share price is almost exactly where it was two years ago. A lot has happened during that time including asset sales and the COVID-19 pandemic.
Telstra’s profit fell in FY20 despite Australians being at home more in 2020, despite more online shopping and more online entertainment being consumed. Telstra announced that its total income decreased by 5.9% to $26.2 billion. Telstra’s net profit dropped by 14.4% to $1.8 billion.
The mobile division saw continued strength in FY20. It added 240,000 retail postpaid mobile services, including 154,000 from Belong. It also added 171,000 retail prepaid handheld unique users.
Overall mobile revenue declined $461 million. Postpaid handheld average revenue per user (ARPU) declined 8.2%, or 6.8% excluding the impact of COVID-19 on international roaming revenue.
And that’s one of the biggest problems in my opinion. If you look at data usage and customer numbers then yes, Telstra is seeing increasing demand. But it’s not translating into higher revenue or higher profit. Margins keep falling for the telecommunications company as competition continues to heat up. Not only are the big competitors always there like Optus and TPG Telecom Ltd (ASX: TPG) – which includes Vodafone – but it also has smaller competition such as Amaysim Australia Ltd (ASX: AYS), Aldi Mobile, Boost and so on.
Why would the Telstra share price rise if the net profit keeps dropping? Don’t forget, it just received a huge $50 million fine.
NBN problems
The NBN continues to hurt Telstra’s margins as well. The NBN takes up more of the share of revenue compared to the old setup that Telstra had with its customers. The transition is nearly complete, so this should mean an end to the profit decline.
But where is profit growth going to come from? Rising mobile users hasn’t been enough. Perhaps 5G will unlock more services that Telstra could generate earnings from? Will automated cars be the answer? Perhaps other services that we just can’t imagine yet?
One growth area could be offering wireless internet, powered by 5G mobile services instead of the NBN. This would disrupt the NBN, but it could unlock higher margins if the NBN isn’t involved.
I fear that 5G could end up in the same situation as 4G for Telstra where the value of new services is mostly captured by other companies rather than Telstra (with 4G it was companies such as Alphabet, Facebook and Netflix that got the benefit).
Summary thoughts
Telstra isn’t a bad business, it’s doing what it can by lowering costs. But cutting cost alone isn’t a super-compelling investment case. I think there are plenty of other ASX growth shares that offer better returns potential. In the telecommunications space I’d rather invest in growing businesses like Macquarie Telecom Group Ltd. (ASX: MAQ) and Over The Wire Holdings Ltd (ASX: OTW).
