AT&T’s 27.9% return over the past six months has outpaced the S&P 500 by 22.6%, and its stock price has climbed to $28.36 per share. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in AT&T, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think AT&T Will Underperform?

Despite the momentum, we're sitting this one out for now. Here are three reasons why we avoid T and a stock we'd rather own.

1. Revenue Spiraling Downwards

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. AT&T’s demand was weak over the last five years as its sales fell at a 7.3% annual rate. This was below our standards and is a sign of poor business quality.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for AT&T, its EPS and revenue declined by 9.2% and 7.3% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, AT&T’s low margin of safety could leave its stock price susceptible to large downswings.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AT&T historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.3%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

AT&T falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 13.6× forward P/E (or $28.36 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.

Stocks We Would Buy Instead of AT&T

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

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