It’s been a rollercoaster couple of days for BT (LSE: BT.A) shares. The stock jumped 5.6% on Thursday after better-than-expected results, only to give back almost all those gains today (6 November), falling close to 6%.
With the FTSE 100 down 2.25% amid fears the AI bubble could burst, BT has had plenty of competition for the unwanted title of today’s worst performer. But why is a British telecoms giant being hit so hard by the Wall Street technology sell-off anyway?
Investors are questioning whether the enormous sums being poured into AI will ever generate sufficient returns. They’re also looking at companies that have built ambitious business plans around the technology, and wondering what happens if the promised benefits don’t materialise.
Investors fear missed targets
BT has made a particularly big bet on AI by using automation to slash its workforce. It has already cut 7,731 jobs since March, taking employee numbers to around 90,000. The longer-term ambition is to reduce that to between 75,000 and 80,000.
A good chunk of those savings is expected to come from AI. But if the technology disappoints, BT could find itself more reliant on human beings than management would like.
Chief executive Allison Kirkby is targeting normalised free cash flow of £2bn in the current financial year, rising to £3bn by 2030. If AI comes up short, so will she.
Personally, I wonder if markets are reading too much into the AI panic. AI isn’t suddenly going to become unavailable. Even if companies rein in spending, there should be plenty of opportunities for BT to use it to transform working practices.
Today’s dip may also represent a backlash to Thursday’s well-received results. Pre-tax profits rose 12% to £1.1bn, beating expectations, while Openreach’s earnings improved as more customers moved onto full fibre. However, BT still lost 366,000 broadband lines in the first half, while average monthly broadband revenue per customer fell 3% to £40.80, amid fierce price competition.
BT faces plenty of other challenges. Net debt has risen to £21bn, almost exactly matching its market cap. Rising interest rates will make servicing it more expensive.
The £400m TalkTalk acquisition brings 2.5m customers, but a major integration challenge. BT must keep investing heavily in its fibre network while fighting alternative network providers and mobile rivals.
A key cash-flow challenge
With a price-to-earnings ratio of around 12.7, BT looks reasonably valued. The shares have climbed almost 30% over the past year, but that’s reduced the trailing yield to 3.85%.
I’ve been hovering around BT for a long time, but fierce competition, stubbornly high debt and now the TalkTalk integration make me wonder if the potential rewards justify the risks.
Given that today’s drop only reverses Thursday’s jump, I don’t see any need for existing BT investors to consider bailing out. But I wouldn’t say we’re staring at a brilliant buying opportunity either. I won’t consider BT today. This FTSE 100 growth stock excites me more….
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Harvey Jones does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
