The Telstra Corporation Ltd (ASX: TLS) share price is underperforming the S&P/ASX 200 Index (ASX: XJO) on Monday afternoon.
At the time of writing the telco giant's shares are trading flat at $2.84. This compares to an impressive 1% gain by the benchmark index.
Why is the Telstra share price underperforming?
The underperformance of the Telstra share price on Monday appears to be in relation to the release of its iPhone 12 plans on Friday night.
Compared with rivals Optus and TPG Telecom Ltd (ASX: TPG), Telstra was very aggressive with the pricing of its plans and has discounted them far more than many expected.
A note out of Goldman Sachs this morning commented on the price changes.
Goldman said: "The key promotion was from Telstra, who launched a very aggressive $50/m discount on its XL plan ($65/m, down from $115) as it looks to be making an aggressive play for 'premium' subscribers, as it looks to leverage its superior 5G network (i.e. 40% coverage currently)."
The broker believes this makes Telstra's high-end offering very compelling relative to the industry.
While this is expected to support subscriber growth at a price point that is accretive to its average revenue per user (ARPU), it suspects it could also lead to a significant migration of Telstra's existing $85/m and $115/m subscribers to this price point. It fears the latter could present a meaningful average revenue per user (ARPU) headwind.
Positively, the broker notes that competition at the lower end of the market has been very subdued, with only limited changes to entry level price points.
What now?
Goldman Sachs remains positive on Telstra and still expects its postpaid ARPU to grow in the second half of FY 2021 and then accelerate in FY 2022.
It explained: "Overall, although we are surprised with the extent of Telstra's promotion, given the subdued competition at the lower end of the market, and the limited price response from Optus/Vodafone to date, we do remain constructive on the outlook for the mobile industry. This view is premised on our belief that industry pricing needs to continue trending higher (likely in early 2021) to support returns through the 5G investment cycle."
"We forecast Telstra postpaid ARPU to positively inflect in 2H21E (-5% / +1% in 1H21/2H21) before growth accelerates in FY22 (+4%) given a recovery in roaming revenues and the significant 5G price rises in July. With positive ARPU inflections driving share price outperformance we stay Buy on Telstra [price target of $3.60], with the next catalyst its November 12 Investor Day," it concluded.
