Why this leading broker just downgraded Telstra (ASX:TLS) shares

This telco giant was just downgraded…

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Key points

  • Telstra shares were on fire in 2021
  • Goldman Sachs believes they are close to peaking
  • Downgrades from buy to neutral rating

The Telstra Corporation Ltd (ASX: TLS) share price will be one to watch on Monday.

This follows news that one of Australia’s leading brokers has downgraded the telco giant’s shares.

Who downgraded the Telstra share price?

According to a note out of Goldman Sachs this morning, its analysts have downgraded the company’s shares to a neutral rating but held firm with their price target of $4.40.

Based on the current Telstra share price of $4.09, this implies potential upside of 7.6% for investors.

However, this was deemed to be insufficient for Goldman to maintain its buy rating, hence its downgrade to neutral this morning.

What did the broker say?

Goldman made the move on valuation grounds, believing that the risk/reward on offer with the Telstra share price was no longer attractive enough following a very strong gain in 2021.

The broker explained: “Following strong share price performance in 2021, TLS now trades: (1) at a premium to global peers; (2) a 2.0% yield spread vs. 10Y AU, > 1std below its LT avg; and (3) broadly in-line with our 12m TP of A$4.40. Hence we downgrade our rating to Neutral (from Buy), given a more even risk/reward.”

Though, it is worth noting that Goldman has provided a few scenarios that pose upside risk to its valuation.

It said: “We see upside risk from: (1) continued mobile strength; (2) infrastructure valuations; (3) Capital management, given strong FCF; and (4) Improved NBN pricing/FWA penetration.”

But for each of those potential positives, the broker has named a downside risk for investors to consider as well.

Goldman explained: “We see downside risk from: (1) FY25 targets requiring strong execution and market rationality; (2) concern around NBN re-sale margin targets; (3) Enterprise headwinds from SD-WAN, NBN & HyperOne; and (4) timing of infrastructure monetisation (we prefer data centre operator Nextdc Ltd (ASX: NXT) (on CL, +41% upside) for digital infra exposure).

Motley Fool contributor James Mickleboro owns NEXTDC Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Telstra Corporation 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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