Telecom giant AT&T(NYSE: T) is embarking on a revamp of its wireless network infrastructure. The company announced last week that it had signed a deal with Sweden's Ericsson to spend as much as $14 billion over five years to deploy open radio access network, or Open RAN, technology.
Within a wireless network, the RAN is responsible for connecting end-user devices to the core network. Devices such as smartphones send data to a RAN's transceivers, which then does complex processing before passing that data along to the core wireless network. That core network then connects to the internet.
RANs are a mix of hardware and software. AT&T currently uses proprietary solutions that couple together hardware and software. Open RAN disaggregates the different components, allowing for hardware from different vendors and software from different vendors to work together. By adopting Open RAN technology, AT&T will have the ability to mix and match suppliers and build a highly flexible network that is potentially more cost-efficient.
The plan is to have Open RAN sites operating in 2024 before scaling up using multiple suppliers in 2025. By late 2026, AT&T expects to be running 70% of its wireless network traffic through its Open RAN deployments. The increased flexibility should help AT&T speed up the deployment of next-generation wireless technology when it becomes available.
Meaningful benefits
AT&T CEO John Stankey made it clear during a conference soon after the announcement that this Open RAN deal was not a game changer. It will, however, provide some important benefits in the long run.
For AT&T, more competition in the Open RAN market is a good thing. It means more hardware and software choices, better products, and potentially better pricing as vendors compete for business. One reason AT&T committed to Open RAN was to spur competition in the hopes of lowering network costs and boosting efficiencies.
"I don't think it's going to move the needle from a capital intensity perspective," Stankey said about the Open RAN deal. The company isn't changing its overall outlook for capital spending. However, the efficiencies Open RAN eventually unlocks could allow AT&T to boost investment in other areas.
Fiber internet is a long-term growth opportunity for the company, but laying fiber is expensive, and the payoff doesn't come until homes and businesses become subscribers. AT&T is planning to pass 30 million locations with its fiber network by the end of 2025, but there may be room to boost that target higher thanks to the Open RAN deal. By making its wireless capital spending go further by adopting Open RAN, any savings could be reallocated to expanding the fiber network .
This Open RAN deal means a lot more to AT&T's vendors in terms of near-term financial impact than AT&T itself. But it should yield long-term benefits that are harder to quantify for AT&T, including increased flexibility and a simplification of its network infrastructure.
AT&T stock is a buy, Open RAN or not
The Open RAN deal isn't a reason to pile into AT&T stock, but a rock-bottom valuation, solid performance in the wireless business, and a sky-high dividend certainly are.
With AT&T expecting to generate around $16.5 billion of free cash flow this year, the stock trades for just over 7 times free cash flow. That's a valuation that doesn't reflect AT&T's solid performance. The company has been consistently growing its wireless subscriber base, adding 468,000 net postpaid phone subscribers in the third quarter, and its fiber business has been expanding by nearly 300,000 subscribers per quarter.
That free cash flow more than supports the dividend, which currently yields 6.5%. The dividend consumes less than half of AT&T's free cash flow, based on the company's guidance, leaving plenty left over for debt reduction.
AT&T is making a forward-thinking decision to revamp its wireless network with Open RAN technology. While there won't be a huge payoff in the short term, the switch positions the company to improve the efficiency of its network in the long run. That's good news for shareholders as AT&T works to grow its free cash flow generation and pay down some of its debt.
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Timothy Green has positions in AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
