Is the Telstra share price on the way back up?

The shift to the NBN has finished. What does this mean for Telstra?

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Key points

  • The Telstra share price has struggled over the past few months and years
  • But, the end of the transition to the NBN could be a turning point for the company
  • The 5G rollout and profit growth could help revitalise the Telstra share price

The Telstra Corporation Ltd (ASX: TLS) share price has experienced quite a bit of volatility in 2022, just like many ASX shares in the S&P/ASX 200 Index (ASX: XJO).

In the year to date, the Telstra share price has fallen 5.9%. It closed yesterday’s session at $3.97.

However, there are signs that Telstra could start to generate earnings growth in the next few years. And that could do good things for the share price.

What’s next for the Telstra share price?

For starters, the telco has itself provided guidance that it’s expecting to deliver profit growth in the next couple of years.

But, one interesting line of thought relates to the NBN. There is also potential opportunity when it comes to home broadband.

Let’s look at what one expert, David Cassidy from Wilsons, has said about the situation in an article on Livewire.

NBN difficulties

Cassidy noted Telstra’s net profit after tax (NPAT) has been “plagued” by headwinds created by the NBN over the past decade.

He pointed out that the Telstra share price started hurting in 2015. This was mainly because of the impact of the Federal Government’s NBN rollout, which damaged revenue.

Telstra is not the dominant provider of wholesale fixed-line networks in Australia anymore. The NBN has steadily replaced Telstra’s legacy fixed-line copper wire network. Telstra’s earnings lost out as customers transitioned to NBN broadband services.

Telstra is now just a retail provider that re-sells NBN access. Cassidy said that Telstra has to compete with other service providers on a “level playing field”.

There has also been a “significant increase” in costs in providing fixed broadband services for Telstra and competitors, hurting margins. Intense competition and aggressive price cutting have hurt operator margins.

The expert noted that these impacts can be seen in the heavy decline in Telstra’s earnings before interest, tax, depreciation, and amortisation (EBITDA) from FY17 to FY21.

In parallel, the Telstra share price has fallen by 2.5% over the past five years to date.

Turning point?

The NBN rollout is “effectively complete”, meaning that there aren’t really any more customers to lose. In other words, “the ongoing drag from the migration of its legacy network is all but over”.

While the hole of the lost home broadband revenue/earnings is still there, Cassidy suggested that earnings “will likely” have bottomed in FY22, establishing a new base to grow from.

Telstra is “entering into an earnings per share (EPS) upgrade cycle, with analysts increasing their earnings forecasts in a sustained manner for the first time in years.”

The Telstra 5G network could be a key driver of the business. Not only can it continue its leadership in the sector, but a strong 5G network could allow Telstra to offer wireless broadband, meaning 5G-powered home broadband. This would enable a significant increase in the margin for each household connection.

Telstra’s T25 strategy also focuses on a further reduction of costs. Revenue could also increase for its mobile division as it raises prices in line with CPI inflation.

Foolish takeaway

Cassidy said that the Telstra share price is attractive when looking at cash earnings rather than statutory earnings because of how capital expenditure spending is structured.

At the time of publication, he said that Telstra was valued at a price-to-equity free cash flow multiple of 16.4 times.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in 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 Scott Phillips.

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