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Why the Telstra (ASX:TLS) share price could be heading higher from here

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On Tuesday morning, the Telstra Corporation Ltd (ASX: TLS) share price hasn’t been able to build on yesterday’s solid gain.

At the time of writing, the telco giant’s shares are down slightly to $3.48.

Why did the Telstra share price rise on Monday?

Investors were buying Telstra’s shares on Monday in response to some positive industry news.

That news was that arch-rival Optus has raised the pricing on all its mobile plans by $6 per month. This represents an 8% to 15% increase and is meaningfully larger and earlier than experts were expecting.

According to a note out of Goldman Sachs, its analysts note that this means its entry level price point has lifted to $45 per month, which will be accretive to Optus’ reported average revenue per user (ARPU).

What does this mean for Telstra?

While Goldman doesn’t expect the changes to impact Telstra’s pricing, it believes the overall impact to the Australian mobile market will be positive and support industry ARPU growth.

The broker does, however, see this as an opportunity for TPG Telecom Ltd (ASX: TPG) to lift prices.

Goldman said: “We believe these changes provide a clear opportunity for Vodafone (TPG) to follow, and remove the $5/m discounts it currently has across its plans. However we do not expect Telstra to change its pricing, as Optus’ increase follows the 5G price increases implemented by Telstra in July-20. Instead, we believe Telstra will continue to focus on up-selling customers to higher tiers.”

“Overall these changes support our positive view on the Australian Mobile market, which we believe is set for an extended period of ARPU growth as the industry looks to generate adequate returns on 5G investment and recovers from intense competition/lost mobile roaming revenue.”

Is the Telstra share price in the buy zone?

Goldman remains very bullish on Telstra and has retained its buy rating and $4.00 price target.

It said: “We stay Buy on Telstra ahead of the earnings’ inflection, believing that it will re-rate as it becomes a ‘simpler’ telco post NBN completion, along with further upside from possible asset monetisations.”

And although its sees positives from Optus’ price increases for TPG Telecom, it isn’t enough for a buy recommendation. It has held firm with its neutral rating and $7.10 price target.

It explained: “We stay Neutral on TPG as despite favorable mobile market trends and valuation support emerging, we remain cautious given: (1) Vodafone’s 5G network meaningfully lags TLS/Optus, while in-market mobile pricing is lower yoy; (2) TPG trading multiples are still in-line with TLS; and (3) The unexpected departure of the Chair and upcoming escrow completions (i.e., escrows on over 64% of TPG equity finish Jul-22) are likely to remain an overhang on the share price.”

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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