While most of telecom-giant AT&T's (NYSE: T) revenue comes from its wireless service, the company is growing its fiber internet business. It has the benefit of already having some infrastructure in place in the markets it's targeting for fiber service, which makes expanding the network less capital-intensive.
Still, building out a fiber network is a costly endeavor that only pays off once households and businesses sign up for and stick with the service. AT&T plans to reach at least 30 million potential customer locations by the end of 2025 with its fiber network, but only a fraction of those locations will pay for the service.
At the end of the second quarter of 2025, AT&T had about 8.8 million fiber connections with 27.8 million locations passed. Excluding businesses, the fiber penetration rate for AT&T was about 40%.
Growing the fiber business
There are three ways for AT&T to drive growth in its fiber business. First, it can pass more locations with its network to create more potential customers. The company should add a few more million locations over the next year and sees a path to as many as 45 million locations passed down the road.
Second, the company can boost the penetration rate by convincing more eligible households and businesses to sign up for the service. The consumer fiber penetration rate has increased by about 3 percentage points over the past two years, so the company is making some headway on this front.
Third, AT&T can raise prices. Average monthly revenue per fiber customer was $69 in the second quarter of 2024, up from $61.65 two years prior, and that number will climb even higher in 2025 as the company enacts a broad price hike.
Starting Nov. 10, AT&T will raise the monthly price on all its internet plans, both fiber and non-fiber, by $5 per month. AT&T offers discounts for customers using autopay and paying with a bank account, so the average revenue per subscriber may rise by less than that amount as subscribers look to lower their bills. Still, this price hike represents a 7.2% increase, based on the average revenue per subscriber in the second quarter.
Combined with winning more customers by building out the network and raising penetration rates, AT&T should have no trouble growing fiber revenue at a double-digit pace in 2025. Fiber revenue rose by about 18% year over year in the second quarter.
Free-cash-flow growth
AT&T will spend between $21 billion and $22 billion in capital expenditures this year, much of which will go to supporting its wireless and fiber networks. Despite that spending, free cash flow is expected to come in between $17 billion and $18 billion, up from $16.8 billion in 2023.
The fiber business is now at a $7.2 billion annual revenue run rate, and that number should continue to grow at a double-digit rate. Building out fiber capacity is capital intensive, but fiber lines require little in the way of maintenance and can last for decades. As AT&T reaches the mature stages of its fiber buildout, the business will start throwing off plenty of cash.
AT&T stock has soared more than 50% over the past year as investors have warmed up to the telecom giant. Despite that rally, the stock still trades for less than 9x the midpoint of the company's free-cash-flow guidance. Shares of AT&T aren't as cheap as they were a year ago, but it's not too late to buy this cash-flow machine.
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Timothy Green has positions in AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
AT&T's Fiber Price Hike Will Boost Revenue in 2025 was originally published by The Motley Fool