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Why the Telstra (ASX:TLS) share price could be under pressure in 2021

Telstra

The Telstra Corporation Ltd (ASX: TLS) share price has had a rough ride in 2020, falling 20.7% lower to $2.84 per share. In contrast, the S&P/ASX 200 Index (ASX: XJO) is down 12.2% in the same time to 5,875.90 points.

Why is the Telstra share price falling?

The coronavirus pandemic has hurt earnings despite the telco maintaining its 16 cents per share final dividend. There is also the ever-present threat of the NBN which continues to hit the company’s top and bottom lines.

That NBN threat could be about to get even more serious, according to an article in the Australian Financial Review (AFR). The government-backed network company is making some serious waves that could put the Telstra share price under pressure.

What’s changing at NBN Co?

Communications Minister Paul Fletcher and NBN Co CEO Stephen Rue have announced some big changes which could weigh on the Telstra share price.

Mr Fletcher says that by 2023, 75 per cent of fixed-line premises will be able to order significantly faster broadband at 1 gigabyte per second.

This is all part of NBN Co’s 2021 corporate plan which forecasts earnings before interest, tax, depreciation and amortisation (EBITDA) of $4.5 billion by June 2024 and revenues of $6.2 billion.

For reference, Telstra recently posted total income down 5.9% to $26.2 billion with underlying EBITDA down 9.7% to $7.4 billion.

Some quick and dirty numbers by the AFR suggest that based on relative valuations and NBN’s forecast cash flows, the company’s enterprise value (equity + debt – cash) could be worth nearly $100 billion.

The NBN does look like it could cause some headaches under the new and improved plan. What does this all mean for the Telstra share price?

What it means for the Telstra share price

The introduction of faster NBN speeds is a big deal for Telstra. The telco’s 5G network can reportedly offer mobile modem plans of around 700 megabytes per second. 

These plans would come at a cheaper cost than the estimated faster NBN plans. That could mean Telstra could continue carving out its own niche alongside a growing NBN.

However, there’s no doubt this is a threat for the Telstra share price and its dividends. I think ultimately there is still plenty of uncertainty around the 5-year plan and a lot of execution risk involved.

The company’s push into a new tech agreement with Microsoft Inc. (NYSE: MSFT) could also be an indication of things to come. The telco is looking to leverage that connection to grow its capabilities in 5G, cloud computing and artificial intelligence.

A transformation away from being a pure telco into more of a technology company could ultimately be a good thing for the Telstra share price.

Foolish takeaway

I wouldn’t panic just yet. If Telstra can continue generating cash and positioning itself as a market leader, those dividends can be maintained for some years to come.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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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