AT&T Just Delivered for Investors. It's Not Too Late to Buy the Stock.

Telecom giant AT&T (NYSE: T) has a simple growth strategy: Win high-value customers who use its wireless and fiber services together. The company picked up plenty of those so-called "converged" customers in the third quarter, with strong subscriber growth in both postpaid phones and fiber.

Image source: AT&T

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On the surface, AT&T's results were mixed relative to analyst expectations. While earnings per share came in ahead of estimates, revenue fell a bit short. However, the company reiterated its full-year guidance despite economic headwinds. Mobility service revenue is expected to grow by at least 3% for the year, consumer fiber revenue should grow by a mid-to-high-teens percentage, and free cash flow should top $16 billion.

While there were a few minor areas of concern with AT&T's third-quarter report, investors should be generally happy with the company's performance. With the stock having slumped over the past few months, now's a great time to invest in the telecom giant.

The good: Subscriber growth, free cash flow, and buybacks

AT&T added 405,000 net postpaid phone subscribers in the third quarter, slightly more than the 401,000 adds during the second quarter. Mobility service revenue grew by 2.3% year over year, and mobility earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped by 2.2%.

In the consumer wireline business, AT&T is winning with both fiber and Internet Air, its 5G-powered home and business internet service. AT&T added 288,000 net fiber subscribers in the third quarter, bringing the total number of subscribers to 10.1 million. Another 270,000 subscribers signed up for Internet Air, which fills the gap in areas where AT&T hasn't expanded its fiber network. Fiber revenue soared 16.8% year over year.

There are now 4.2 million customers who subscribe to both AT&T's wireless and fiber services, representing 41.5% of the fiber install base. That percentage has been rising over time, up from 39.7% in the third quarter of 2024. These converged customers tend to be less likely to switch providers while generating more lifetime revenue, making them extremely valuable to AT&T.

AT&T generated free cash flow of $4.9 billion in the quarter, up from $4.6 billion in the prior-year period. For the full year, the company expects free cash flow of at least $16 billion. Looking further ahead, the company sees free cash flow topping $18 billion in 2026 and $19 billion in 2027.

That free cash flow is being put to use to power AT&T's share buyback program, which began in earnest in the second quarter. The company repurchased $1.5 billion of its own shares in the third quarter, adding to $1 billion in buybacks during the second quarter. AT&T also reduced its net debt by $6.9 billion over the past year. With the stock trading in bargain territory relative to free cash flow, those buybacks look like a great use of capital.

The not-so-good: Higher churn and dipping ARPU

While AT&T's results were generally positive, there were a few minor hiccups that investors should be aware of. First, postpaid phone churn is ticking up. Postpaid phone churn was 0.92% in the third quarter, up from 0.78% in the prior-year period. That's still low in an absolute sense, but it could be a sign that consumers are becoming more willing to switch providers in search of deals and incentives.

Second, average revenue per postpaid phone user is now trending in the wrong direction. Postpaid phone ARPU was $56.64 in the third quarter, down 0.8% year over year. While AT&T didn't say what was behind the decline, it could be a sign that customers are feeling some financial strain and opting for lower-cost plans.

These two metrics should be on investors' radar, especially as the U.S. economy seemingly careens toward a potential recession. However, the good greatly outweighed the bad in AT&T's third-quarter report.

AT&T stock is still a solid value

AT&T has a market capitalization of about $188 billion. That puts the price-to-free-cash-flow ratio based on the company's 2025 guidance below 12. If you use the 2027 outlook, the P/FCF ratio falls below 10.

Free cash flow could come under pressure if AT&T's customers start to struggle financially. Customers could switch to cheaper plans or delay monthly payments, both of which would put pressure on AT&T's free cash flow. However, given the pessimism built into AT&T's valuation, there's a big margin of safety for investors.

AT&T delivered solid results in the third quarter, with consistent subscriber gains across wireless and fiber. The company's buyback program will help boost earnings per share in the years ahead, and free cash flow is likely to rise as the converged strategy pays off. For long-term investors, AT&T stock looks like a buy.

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.