Telecom giant SK Telecom plans to quadruple its market capitalization within 3 years thanks to AI

Everyone knows that AI will be extremely important in the future. And so does telecommunications giant SK Telecom, which plans to incorporate it into its business in a big way. Can it help the company's stock?

According to experts, SK Telecom $SKM+1.2% has long-term growth potential based on continued ARPU and subscription growth and, most importantly, the potential to leverage AI. But let's take it one step at a time.

What is SK Telecom?

SK Telecom is a South Korean telecom operator that provides a wide range of telecom services, mainly mobile data, fixed line, internet and TV. The company has a dominant position in the South Korean market and is one of the largest telecommunications operators in South Korea.

In terms of financial performance, SK Telecom has performed steadily in recent years. In 2022, it achieved a net profit exceeding 1.8 trillion South Korean won (about $1.5 billion), which was slightly lower than the previous year. However, the company saw a significant increase in sales, indicating strong and stable growth.

In the field of technology, SK Telecom is focusing on the development and implementation of 5G networks, which makes it poised for further growth and development. 5G technology brings significant improvements in network speed and reliability, which is expected to contribute to the further development of the South Korean economy and boost demand for SK Telecom's services.

In general, SK Telecom's long-term outlook appears to be favourable due to the strong performance of the media segment as well as a significant increase in cash levels and a decline in long-term debt. Most importantly, the fear of a recession in the US should play into their hands. Let's take a look at the Investor Briefing issued by the company a few days ago.

Looking at performance for the full year 2022, we can see that revenues in the media segment continued to grow strongly - up 20.8% from the prior year

Income statement

Additionally, while ARPU declined from the previous quarter, we can see that this metric grew 0.8% year-over-year. From this perspective, performance on an annual basis remains encouraging. Looking at the EBITDA development, we see that while in 4Q22 we saw a slight decrease in EBITDA compared to the previous quarter. However, both EBITDA and EBITDA margins were generally higher than last year.

Margins and EBITDA

As I wrote in the introduction - the hunger for 5G will continue to grow. And you can see that in this chart. Subscriber numbers are up 5% from last quarter and up to 58% from 42% in the same quarter last year.

In terms of the balance sheet, the summary shows that cash to debt obligations and long-term borrowings remain higher than the same quarter last year - albeit with a significant decline from the previous quarter.

Key figures

Going forward, the key question will be whether sales and subscriber activity will continue to see significant growth given inflationary and macroeconomic pressures.

AI

Increasing attention will be paid to SK Telecom and its AI ambitions as the company plans to reach a market capitalisation of over USD 28 billion by 2026, reportedly almost four times its current market capitalisation. The purpose of these investments is to diversify away from traditional telecom company revenues.

In particular, the company is using AI to make significant investments in the media segment - with initiatives such as an AI-powered media player that seeks to improve search personalization capabilities.

https://www.youtube.com/watch?v=sn8ETOPO9gw

Valuation and competition

In absolute terms, the market values SK Telecom at 3.8 times consensus future EV/EBITDA. According to statistics, SKM is the absolute leader in the South Korean mobile market with a 45% market share. As the competitive environment in the Korean wireless market becomes less intense as highlighted above, SK Telecom should achieve a higher EV/EBITDA multiple than what it is trading at now.

In particular, Telecom's main competition is likely to be Verizon $VZ+0.8%. Given that Warren Buffett has invested a lot of money in Verizon (and the stock has outperformed the S&P 500 index since February 16), the public has become much more interested in Verizon and global telecom stocks as they conduct more analysis to figure out why Warren Buffett has invested so much money in a boring telecom company that has underperformed the market over the past year.

SK Telecom is currently trading at an EV/EBITDA multiple (2021) of 4.5x, which is 41% lower than Verizon's EV/EBITDA multiple.

SK Telecom's expected dividend yield in 2021 is 4.3%, slightly lower than Verizon's expected dividend yield of 4.5%. Verizon's ROE is expected to be 29% in 2021, compared to SK Telecom's ROE of 7.9% in 2021. However, SK Telecom has a stronger balance sheet, with a debt ratio of 95.5% at the end of 2020 compared to Verizon's debt ratio of 436.5%.

SK Telecom's dividend
Telecom's dividend history. Source

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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