Can the Telstra Corporation Ltd (ASX: TLS) share price reach $5 in 2020?
It would be a hard task but it would certainly be possible. 2019 isn't quite over, but during the year the share price has added 33%. If it added 33% again in 2020 from today's price it would reach $4.90, nearly $5!
How likely is it that Telstra would add another 33%? Normally a business only delivers a market-beating performance when it delivers a result that beats expectations. I'd only say 33% share price growth is possible for businesses that are growing profit.
FY19 did not deliver profit growth for Telstra. Its reported revenue fell by 3.6% and net profit declined by almost 40%.
Management are predicting that FY20 total income will be between $25.3 billion to $27.3 billion and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) will be between $7.4 billion to $7.9 billion.
Those numbers compare to the FY19 'guidance basis' revenue of $27.8 billion and underlying EBITDA of $7.8 billion. So management are definitely predicting a revenue fall and unless Telstra delivers a strong result its profit will fall too.
Telstra said that included in the FY20 guidance is a $0.6 billion to $0.8 billion NBN headwind as well as $0.3 billion of restructuring costs. The NBN has been a huge disaster for Telstra. The profit margins for the telco have been smashed and competition has increased from the likes of TPG Telecom Ltd (ASX: TPM). Telstra lost the dominant position of owning the infrastructure.
Share prices follow earnings over the long-term. Telstra is predicting that earnings are likely to fall in FY20 and perhaps even in FY21, so I can't see the share price doing much over the next 12 to 18 months.
The key will be 5G. There will be many services we can't even imagine yet that will appear thanks to 5G and hopefully that leads to higher revenue for Telstra. One obvious service is automated cars which will need excellent connectivity to work properly.
Foolish takeaway
I don't think the share price will even hit $4 unless Telstra can grow its profit in FY20 thanks to its cost-cutting strategy. It's trading at 19x FY21's estimated earnings. I think this is too expensive for a business currently going backwards. I only think it will go above $4 when we learn about the economics of 5G.
