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Can 5G drive Telstra’s share price higher in 2020?

For several decades, Telstra Corporation Ltd (ASX: TLS) was the undisputed king of the Australian telco market.

The market power that Telstra wielded was enormous.

As it owned the national fixed line network for broadband and voice, it was able to set the price that it charged other telcos using its network.

In fact, few telcos globally yielded this much power.

This translated to high margins, which flowed through to high company profits and a very high dividends for its shareholders.

However, this has now all changed because of the rollout of the National Broadband Network (NBN).

Telstra’s NBN pain

No longer did Telstra own the national network. Telstra is now placed on a level playing field with other telcos such as Vocus Group Ltd (ASX: VOC).

There is also rising competition from low cost telcos such as TPG Telecom Ltd (ASX: TPM) and mobile resellers such Amaysim Australia Ltd (ASX: AYS), all trying to increase their market share, placing further pressure on Telstra’s margins.

This trend is reflected in Telstra’s share price, which peaked at $6.67 in March 2015 before declining to as low as $2.62 in mid-2018. The Telstra share price has now regained some of its lost ground, now trading at $3.70.

What did Telstra do in response?

Telstra has been undergoing significant short-term pain as it restructures strategy into a leaner company, so it can remain in a dominant number 1 market position.

It also has had to absorb increased investments in its 5G network to gain an upper hand on its 2 major competitors in the mobile sector, Optus and Vodafone, and take market share away from them.

Telstra recently revealed that it’s on track to strip out a total of $2.5 billion in costs by 2022. It also stated that it is on track on its EBITDA and free cash flow guidance in FY20, which is positive news to shareholders

Also, Telstra’s current 16 cents per share dividend now appears to be sustainable from its free cash flows.

5G could be a game changer for Telstra

Telstra needs to go further than just cost-cutting and restructuring if it is to significantly grow its business over the longer term.

Launching new 5G services is a key way that Telstra can achieve this.

5G has the potential to offer even faster broadband speeds than the NBN, providing Telstra with a real opportunity to also gain new mobile broadband subscribers from dissatisfied NBN customers.

Telstra has already conducted trials on its 5G network with speeds over 700 mbps – that’s 7 times the current speed of the 4G network and faster than nearly all existing NBN customers.

TPG’s withdrawal from the 5G race also places Telstra in a better position to capitalise on the 5G opportunity.

By offering wireless mobile broadband via its own 5G network, this will enable Telstra to bypass the NBN and offer 5G wireless broadband to reap higher profit margins.

However, the potential to take away revenues from the NBN for broadband needs to be put in perspective.

5G will never be a full replacement of the NBN’s fixed line broadband offering. Not only can the reception of 5G wireless broadband be patchy in the home, mobile networks can become overloaded if too many users access the network at the same time.

Also, by holding onto its mobile network assets this will help Telstra to provide further differentiation in a new 5G world.

Foolish takeaway

Telstra’s leadership position and world class network in mobile communications positions it well to fully leverage the potential opportunities of 5G. These include things like driverless cars, smart connected homes and other Internet-of-Things (IoT) applications used in a wide range of industries including agriculture and manufacturing.

Although 5G mobile broadband access will never fully replace NBN’s fixed broadband access, it could see Telstra gain a significant increase to its 5G subscriber base, which could in turn flow into revenue and profitability increases, and then through to a positive impact on its share price.

However, with a 5G launch not expected until later in 2020, I don’t expect any positive impact on Telstra’s share price to flow through until at least 2021.

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Motley Fool contributor Phil Harpur owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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