Can the Telstra share price make it to $5 in 2023?

Profit growth has returned to the telco but can this power its valuation higher?

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Key points

  • Telstra management is aiming for double-digit profit growth over the next couple of years
  • Revenue is growing, particularly for some segments like the Telstra Health division
  • However, it may be tricky for the Telstra share price to get to $5 in a short time

The Telstra Group Ltd (ASX: TLS) share price has gone up by 7% over the past year. After closing at $3.95 on the first day of 2023, Telstra shares finished at $4.21 apiece on Wednesday.

Now, I'm going to consider whether the ASX telco share can indeed rise to $5.

First up, I have to say I love the dividends that ASX dividend shares like Telstra pay, which can come with attractive franking credits. Although, for me, capital growth potential is important as well. I don't want to see appealing dividend income being offset by a steadily falling share price over time.

As it stands, I think there are three main things that could cause the Telstra share price to get to $5 this year.

Profit growth could boost the Telstra share price

For me, a key part of the question is how much profit is Telstra able to deliver and whether it can deliver on its exciting guidance.

Approximately two years ago, Telstra announced its T25 strategy which proclaimed that between then and FY25, the company was targeting a compound annual growth rate (CAGR) of mid-single digits for underlying earnings before interest, tax, depreciation and amortisation (EBITDA) and high-teens for underlying earnings per share (EPS).

I think this is the most important factor that could help the Telstra share price keep rising.

The market is usually focused on the (short-to-medium-term) future, and things are looking positive. One of the main positives to come from the higher inflation environment for Telstra is that it has been increasing its mobile costs to customers in line with inflation, which creates a natural financial boost.

The current estimates on Commsec suggest that the telco made 16.5 of EPS in FY23, with projected EPS growth to 19 cents in FY24 and 20.8 cents in FY25.

But, the market already expects profit growth, so for profit growth to trigger an uplift in the Telstra share price, the telco would need to say something that would indicate that profit growth would be even stronger than expected.

P/E ratio increase 

Using those estimates, the Telstra share price is valued at 22x FY24's estimated earnings.

To get to a $5 share price, we're talking about an increase of 19%. This would put the forward price/earnings (P/E) ratio at 26x. That would be a fairly high P/E ratio for the short term, but it wouldn't be expensive if Telstra is able to deliver on the EPS growth that it's aiming to achieve over the next couple of years.

Telstra shares haven't been at $5 since early 2017, so it would be quite an achievement for the company to rise back to that level. A widespread rise of the share market could push Telstra there but I'm not expecting that level of market sentiment this year, particularly if interest rates don't go lower.

Acquisitions or ancillary growth

The main game for Telstra is its mobile division which has a huge subscriber base that keeps growing as Australia's population grows and international visitor numbers return.

If Telstra's side businesses can surprise investors, or if the company makes a new investment, then this could add some extra value to Telstra in the market's mind.

For example, Telstra is looking to become a major player in the digital healthcare space. In the FY23 half-year result, it said that its health revenue was $147 million, which was a 24% organic increase. I don't think this business (or its other smaller segments, like its international earnings) is at the scale to add more than $4 billion of value to Telstra's market capitalisation in a short time.

An acquisition could excite the market, but I have no information to say that Telstra is about to announce something game-changing.

Foolish takeaway

With profit growth seeming likely, I think the Telstra share price can keep rising. However, it could be a bit of a stretch to get to $5 in less than six months. That said, I wouldn't be surprised if it gets there in 18 or so months, particularly if interest rates start falling within that time.

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 Group. 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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