Telstra shares have endured a tough 12 months, but has the company reached a pivotal turning point?

After a difficult 12 months, Telstra shares might have received the spark that needed for a rebound – or perhaps it just looks like it.

Introduction to Telstra

Telstra traces its origins back to 1901 when the new government of federated Australia set up the Postmaster-General’s Department (PGD) to run all telephone, telegraph and postal services in Australia. Over time, these all demerged into separate entities. The Telstra as we know it was founded in 1991 when the sector was deregulated, and the company was gradually privatised between 1997 and 2006.

It has never been the same since as it lost its monopoly and has had to compete with competitors. In the early days it was just Optus, and now it is several companies ranging from Optus and Vodafone to more nimble players like Aussie Broadband (ASX:ABB). Yes, there have been some good periods, including the tenures of Sol Trujillo and David Thodey as CEO, and the company has kept pace with technological development – although it has never been as well off as it would have been had it kept a monopoly. But there have been difficult times. It lost $46bn of shareholder value during the tenure of Andrew Penn not just due to competition but its own network outages and sinking bottom line.

Telstra shares are under pressure from immediate challenges

But let’s go to the more immediate past. The company hired CEO Vicki Brady in 2022 to replace Andy Penn. She had an admirable rise to the top, starting her career pouring beers in her father’s pub and working her was up the corporate ladder. She suffered a cancer diagnosis in 2018 but recovered and was hired as CFO in 2019, serving until her promotion.

Beyond the ever growing competition, there is also pressure on Telstra’s network traffic due to streaming services and AI applications not to mention people making calls over the internet instead of through traditional voice calls. Consumers and businesses, reeling from the cost of living crisis, are prepared to hunt around for bargains. And there is pressure from investors to diversify its earnings generally and to adopt AI ahead of its competitors.

Artificial Intelligence to the rescue?

Implementing AI could help it not only make its operations more cheaper and efficient, but could help it distil the data in its systems and provide more value for its customers. One example is the AskTelstra generative AI bot that helps its customer service staff search through 2000 manuals to staff can respond to customer enquiries more quickly and accurately.

In FY23, Telstra made a $2.05bn profit, which was 13% higher than the year before, and over $23bn in revenue. This was followed up with an 11.5% rise in its profit in 1HY24, but this did not impress investors because the company told investors demand had dropped, particularly from professional services. We’re not just talking about the ‘Big 4 accounting firms’, this is a wide range of industries including defence and agribusiness, just to name a couple. It told investors that it picked up tens of thousands of customers from Optus following last year’s outage.

Unexciting guidance

For the full FY24, the company has given the following guidance.

Source: Company

For FY25, it has told investors to expect $8.4-8.7bn Underlying EBITDA. This has not excited investors too much, but something did earlier this week. Namely, the price rises to its pre-paid and postpaid mobile plans. Only 6 weeks earlier, Telstra pledged not to raise prices, but has backflipped and will rise prices above inflation. They are only modest, with most rising 4-6%, although analysts speculate more may be needed as they are only just ahead of inflation and barely ahead of competition. Perhaps what pleases investors the most is management admitting it had made an error, and rectifying it to the company’s benefit.

So is now the time to buy Telstra shares?

No. We will admit that investors will be pleased with this week’s news, but Telstra has very rarely (if ever) been a good investment. It has never reached the highs it reached nearly a decade ago (in 2015), and even these were behind the price at its privitisation. The telco sector is highly competitive and low-margin, and investors should look for sectors where it is high margin and companies can carve out substantial market shares for themselves, protecting them with large economic moats.

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