The Asset No AI Model Can Scrape

Three-quarters of it was never published anywhere and it took forty years to build.

In 2014, AT&T decided to diversify away from its traditional communications business and to own a piece of Hollywood.

AT&T first bought DirecTV for $67 billion: $48.5 billion in cash and stock, plus the assumption of debt. The deal closed in July 2015.

Then, three years later, it bought Time Warner for $108.7 billion—the largest acquisition in the company’s history.

The logic was that owning the pipes and owning what flowed through them would be worth more than owning either alone.

AT&T was able to go on such a large shopping spree because its core business was highly profitable. Wireless was converting about a third of its revenue into operating profit due to its extremely sticky subscriber base.

But that profitable business now had to service ~$190 billion of debt, a ~$15 billion annual dividend, and ~$20 billion of capex, among other projects. Something had to give. Management had to service its debt, and it couldn’t risk cutting the dividend after decades of increases and a shareholder base conditioned to expect it. So capex got cut—specifically, investment in fiber and the network. Those were the investments the core business needed to stay profitable and fend off a consolidating T-Mobile and Sprint.

It also didn’t help that AT&T’s purchase of DirecTV and Time Warner came around the peak of traditional linear TV. Post-merger, Satellite and U-Verse (AT&T’s existing cable TV business) shed more than 2 million subscribers over the next several years.

The core business could no longer support the financial load, especially with new acquisitions falling into secular decline.

Large asset impairment charges logically followed, and after 36 years of paying and growing its dividend, AT&T cut it 47%.

But the core business remained strong.

New management came in, sold off the remaining businesses of DirecTV and Time Warner, and refocused all reinvestment efforts back into the core business.

Admitting the mistake got the core business back on track, but it could not get back the billions in misallocated capital—capital that could’ve reinforced the core business or been returned to shareholders through increased dividends and share buybacks.

I see a similar situation developing today.

The company has spent around $5 billion—about 40% of what the market now says the entire enterprise is worth—buying its way into a consumer-focused market outside its specialty, where a competitor already owns the biggest network.

The stock is also down 68% from its high, and it was thrown out of the Nasdaq-100. But during this stretch, the company posted its 61st consecutive quarter of double-digit revenue growth because of how strong its core business is.

What makes it different from AT&T is that AT&T’s core business is capital-intensive, competitive, and slow. This company’s core business earns a 78.9% gross margin against a peer average of 43.4%, renews 89% of its contracts overall, and renews 94–95% of its contracts that have been in place five years or longer.

At today’s price, the market pays about 17 times EBITDA for that business and close to nothing for its new business that, unlike AT&T, is potentially at a positive inflection point versus the negative one for DirecTV.