Here's why this broker says the Telstra (ASX:TLS) share price is cheap

The Telstra Corporation Ltd (ASX:TLS) share price is cheap according to one leading broker. Here's what you need to know…

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Telstra Corporation Ltd (ASX: TLS) share price may be edging lower today, but one leading broker believes it could be going a lot higher from here.

In afternoon trade, the telco giant's shares are down slightly to $3.11.

Who is bullish on Telstra?

According to a note out of Goldman Sachs this morning, the broker has been looking into the telco market and remains positive on Telstra's prospects.

As a result, its analysts have retained their buy rating and $3.75 price target on the company's shares.

This price target implies potential upside of 20% for its shares over the next 12 months excluding dividends. If you include Goldman's forecast for a 16 cents per share dividend, this potential return stretches to almost 26%.

What did Goldman say?

Goldman Sachs has been looking into the launch of new mobile offerings from both TPG Telecom Ltd (ASX: TPG) and Optus. TPG has recently launched its Felix brand and Optus has launched the Gomo brand.

The broker commented: "In our view, neither Felix nor Gomo pricing is significantly disruptive in the market. While Felix headline pricing looks attractive (i.e.A$35/m for unlimited data), we believe the 5Mbps cap significantly narrows the addressable market."

"Gomo pricing is mid-pack relative to peers, and its price/data proposition (W$25/18GB) is at a similar discount to Belong (offers A$25/10GB) as Optus is to Telstra. The Gomo pricing is consistent with recent commentary suggesting they would be rational on pricing in the MVNO market, given AYS's current sub momentum, and Gomo to be more focused on lower data users," it added.

In light of this, Goldman Sachs remains constructive on Telstra's average revenue per user (ARPU) outlook. It is forecasting a 4.5% decline in the first half, a 1% increase in the second half, and then a 4% lift in FY 2022.

It expects this to be supported by the new iPhone 12, 5G price increases, a recovery in roaming revenues in FY 2022, and continued market rationality and potential 5G use case upside.

Why ARPU is important.

The broker believes this ARPU growth has the potential to drive the Telstra share price higher in the future.

It notes: "Historically, positive mobile ARPU inflections have driven share price out-performance, hence we reiterate our Buy on Telstra ahead of its 2H21 positive mobile inflection (with mobile the most important segment for TLS)."

Goldman remains neutral on TPG Telecom, stating: "TPG is also exposed to an improving mobile market, however, we stay Neutral given: (1) the current share price implies strong market share gains; (2) delayed 5G launch impacting near-term performance."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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.

More on Cheap Shares

Couple at an airport waiting for their flight.
Cheap Shares

Is Qantas a bargain ASX 200 stock today?

Analysts at Goldman Sachs think the Flying Kangaroo could be dirt cheap.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Cheap Shares

1 secretly cheap ASX 200 stock I'm buying for the long run

The best performer on the index last year has had a poor start to 2024. Let's examine whether this is…

Read more »

A young woman sits on her bed holding a cup of coffee inside her recreational vehicle hired through the Camplify website
Cheap Shares

3 struggling ASX shares to buy at a discount

These stocks are down temporarily because of temporary issues. This could be a golden opportunity to buy cheap.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

2 'materially undervalued' ASX 200 shares to buy while they're at 'attractive value'

Is there a better feeling in investing than grabbing stocks for cheap then watching while everyone else catches on to…

Read more »

Five happy young friends on the coast, dabbing and raising their arms in the air.
Cheap Shares

5 oversold ASX shares to buy in March 2024

Will you get 'em while they're cheap?

Read more »

Rocket takes off from the hand of a businessman.
Cheap Shares

11% yield? 2 strikingly cheap ASX shares 'primed for recovery'

Discounted stocks are sometimes a value trap, but experts reckon this pair is ready to soar again.

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Cheap Shares

1 top ASX bargain stock that's ready for a bull run!

The market savaged these shares during reporting season, but multiple experts are bullish for the years to come.

Read more »

Three young women on holidays smile at they look at a map.
Cheap Shares

Long-term investing: 3 top ASX stocks you can buy for under $20 a share

These shares don't cost the earth to add to the portfolio, but all represent businesses going places.

Read more »