AT&T reported results in its wireless business – its profit engine – that dramatically surpassed most expectations. However, most financial analysts are maintaining a wait-and-see attitude toward the operator given the growing range of challenges facing AT&T throughout this year and the coming years.

"AT&T appears to be ceding the field in wireless with a network plan that doesn't even attempt to close the gap with T-Mobile and Verizon," wrote the financial analysts at New Street Research in a note to investors released shortly after AT&T disclosed its first quarter financial results. "As with results today, for a little longer AT&T may be able to stem the tide of losses through continued aggressive promotions and retention offers, but this can only go so long given other costly priorities (a massive investment in HBO, a doubling of the fiber footprint) amidst generally constrained resources. Moreover, if they allow the network gap to widen too far, they may not be able to keep subs at any price (as was the case with Sprint in later years)."

Others agreed.

"AT&T is investing in mobile and HBO Max, as it promised, and at great cost," wrote the financial analysts at Sanford C. Bernstein & Co. in a note to investors. "The problem is, there are not enough investment dollars to go around. We believe the share price fairly reflects the highly uncertain outlook, and we are watching ... as the competitive environment evolves."

AT&T executives, though, crowed about the company's better-than-expected performance in the first quarter.

"I believe this demonstrates the formula works," AT&T CEO John Stankey boasted on today's earnings call.

Wireless customer gains

Although Verizon and T-Mobile have begun working to match AT&T's aggressive wireless promotions, Stankey said: "I still think we have room to run." He specifically mentioned AT&T's opportunities to grow in verticals such as Hispanic communities.

"We still have a couple cards to play," he said.

In wireless, AT&T added 595,000 postpaid phone customers during the first quarter, almost double what most financial analysts expected. The figures were particularly noteworthy considering Verizon yesterday reported the loss of 178,000 postpaid phone customers during the same period. T-Mobile is scheduled to report its first-quarter results next month.

Why is AT&T's wireless business performing so well? "Consistency," argued AT&T's Stankey. He said the company hasn't changed its smartphone promotions since they launched late last year, which has given the company's retail sales force the opportunity to focus their efforts without the need to learn about new promotions. But he attributed the situation to a range of other factors, including the company's HBO Max offering. "It's all helping," he said.

AT&T's wireless revenues and earnings also clocked in ahead of most Wall Street projections. "The biggest surprise was wireless margins – they improved despite aggressive retention efforts," the New Street analysts wrote.

AT&T also raised its gross capital investment target for 2021 to $22 billion, up from $21 billion, in part due to an increase in vendor financing.

Rising debt, increasing competition

AT&T continues to struggle under its expensive investments, whether that's the $85 billion it agreed to pay for Time Warner in 2018 or the roughly $28 billion it agreed to pay for C-band spectrum licenses earlier this year. As The Wall Street Journal noted, AT&T's net debt jumped to about $169 billion during the quarter, near the company's 2019 high point. The analysts at New Street noted AT&T's debt has now "swelled to the size of the Ukrainian economy."

Overall, analysts generally expect sales of wireless services to pick up throughout 2021 as COVID-19 lockdowns loosen and shoppers begin looking for new phones and, potentially, new carriers. However, AT&T could find itself increasingly struggling to compete in the coming months and years as T-Mobile and Verizon build out their respective midband 5G networks and offer increasingly competitive promotions to get new customers onto those shiny new networks.

For its part, AT&T said it expects to spend $6 to $8 billion between 2022 and 2024 to deliver 5G services over its own midband C-band spectrum licenses. The company expects to cover up to 100 million people in "early" 2023, but that target generally trails the buildout plans of Verizon and T-Mobile.

Likely as a result, AT&T's Stankey expressed interest in purchasing additional midband spectrum licenses later this year during the FCC's 3.45-3.55GHz spectrum auction. "I believe there could be an opportunity there," he said.

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano