The Telstra Corporation Ltd (ASX: TLS) share price has the potential to beat the S&P/ASX 200 Index (ASX: XJO) return to the end of 2023, in my opinion.
The telco has managed to outperform in 2022. Despite all of the volatility, the ASX 200 has only dropped by 5.7% this year. Telstra shares have declined even less, down 5.2% this year.
Despite the economic challenges, I think the business is set up to do well in the next year. Here are some of the reasons why I hold that belief.
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Good outlook for revenue resilience and growth
One of the things that may have protected the Telstra share price from a large fall this year is how defensive its revenue is. I think that households and businesses view their telecommunications service as an essential, yet inexpensive, bill to pay. The internet is integral for many things these days.
While Telstra's current revenue seems defensive, I think there is good potential for revenue to grow in the year ahead.
The telco is adding more (mobile) subscribers every year.
Tourists are coming back to Australia, which should help increase roaming charges revenue.
For me, one of the most interesting things that could boost Telstra is the fact that it has announced that it's going to increase mobile prices in line with CPI inflation (and this will be reviewed annually). Not only does that suggest that average revenue per user (ARPU) can increase, but inflation is running hot – so this could be a solid boost for Telstra.
Profit growth expected
Revenue growth can feed into profit growth. Net profit after tax (NPAT) is one of the most common ways for investors to value a business, so this would be helpful for the Telstra share price.
Not only is the outlook looking promising for the revenue side, but as part of its T25 strategy, Telstra is also planning to cut around $500 million of net fixed costs between FY23 to FY25. While inflation may make that goal a bit trickier, stronger inflation would be a boost for revenue. Any costs Telstra can cut are a benefit if it doesn't affect the performance of the business.
Telstra said it's expecting that the compound annual growth rate (CAGR) for underlying earnings per share (EPS) will be in the "high-teens". This would be very promising for the Telstra share price if EPS starts rising strongly.
EPS growth could also help dividend growth, which could add to shareholder returns.
The ASX 200 may not rise that much
Not only could the Telstra share price do well, but I'm not sure that the ASX 200 can perform that strongly. In other words, I don't think Telstra will have a high hurdle to beat.
The ASX 200 hasn't sunk like other share markets, so a recovery back to January 2022 levels wouldn't represent a big gain.
I'm not expecting a huge rebound of the iron ore price, it could go even lower from here due to lower Chinese demand. Thus, the shares of BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) – a sizeable part of the index – may therefore not deliver strong returns in 2023.
The other major part of the index is ASX bank shares like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). I think they've already seen a valuation boost in 2022 from the effect of higher interest rates. In my opinion, there aren't likely to be many more RBA interest rate increases, and therefore that share price boosting effect may not be repeated for the banks in 2023. Competition in the sector could also offset some of the benefits of higher central bank interest rates.
So, with those factors in mind, I think the ASX 200 won't perform as strongly as something like the S&P 500 Index (SP: .INX), or the Telstra share price specifically in 2023.
