The Telstra Corporation Ltd (ASX: TLS) share price may be edging lower today, but one leading broker believes it could be going a lot higher from here.
In afternoon trade, the telco giant's shares are down slightly to $3.11.
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Who is bullish on Telstra?
According to a note out of Goldman Sachs this morning, the broker has been looking into the telco market and remains positive on Telstra's prospects.
As a result, its analysts have retained their buy rating and $3.75 price target on the company's shares.
This price target implies potential upside of 20% for its shares over the next 12 months excluding dividends. If you include Goldman's forecast for a 16 cents per share dividend, this potential return stretches to almost 26%.
What did Goldman say?
Goldman Sachs has been looking into the launch of new mobile offerings from both TPG Telecom Ltd (ASX: TPG) and Optus. TPG has recently launched its Felix brand and Optus has launched the Gomo brand.
The broker commented: "In our view, neither Felix nor Gomo pricing is significantly disruptive in the market. While Felix headline pricing looks attractive (i.e.A$35/m for unlimited data), we believe the 5Mbps cap significantly narrows the addressable market."
"Gomo pricing is mid-pack relative to peers, and its price/data proposition (W$25/18GB) is at a similar discount to Belong (offers A$25/10GB) as Optus is to Telstra. The Gomo pricing is consistent with recent commentary suggesting they would be rational on pricing in the MVNO market, given AYS's current sub momentum, and Gomo to be more focused on lower data users," it added.
In light of this, Goldman Sachs remains constructive on Telstra's average revenue per user (ARPU) outlook. It is forecasting a 4.5% decline in the first half, a 1% increase in the second half, and then a 4% lift in FY 2022.
It expects this to be supported by the new iPhone 12, 5G price increases, a recovery in roaming revenues in FY 2022, and continued market rationality and potential 5G use case upside.
Why ARPU is important.
The broker believes this ARPU growth has the potential to drive the Telstra share price higher in the future.
It notes: "Historically, positive mobile ARPU inflections have driven share price out-performance, hence we reiterate our Buy on Telstra ahead of its 2H21 positive mobile inflection (with mobile the most important segment for TLS)."
Goldman remains neutral on TPG Telecom, stating: "TPG is also exposed to an improving mobile market, however, we stay Neutral given: (1) the current share price implies strong market share gains; (2) delayed 5G launch impacting near-term performance."
