Here's why this broker says the Telstra (ASX:TLS) share price is cheap

The Telstra Corporation Ltd (ASX:TLS) share price is cheap according to one leading broker. Here's what you need to know…

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Cheap Shares

Happy work colleagues give each other a fist pump.
Cheap Shares

Morgans names 2 cheap ASX 200 shares to buy

The leading broker thinks these shares are being undervalued by the market.

Read more »

Happy couple looking at a phone and waiting for their flight at an airport.
Cheap Shares

2 ASX 300 shares to buy this month: experts

These stocks could be leading opportunities according to one expert.

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop2
Cheap Shares

Is this beaten-up stock the best value buy in the ASX 200?

An expert has outlined why this stock is an attractive opportunity.

Read more »

A woman smiles as she sits on the bus using her phone and listening to music through headphones.
Cheap Shares

2 compelling ASX shares on sale right now

These businesses look like low-priced opportunities.

Read more »

Smiling man sits in front of a graph on computer while using his mobile phone.
Cheap Shares

2 ASX shares that I rate as cheap buys after the market rally

I still rate these stocks as bargain buys after shares recovered from April’s sell-off.

Read more »

A woman sits in a quiet home nook with her laptop computer and a notepad and pen on the table next to her as she smiles at information on the screen.
Cheap Shares

Is it time to buy these 2 beaten-up ASX shares in 2025?

I’m bullish about these two ASX shares that have gone through a sell-off.

Read more »

Two workers on site discuss the next stage of this civil engineering job, one points his hands upwards.
Cheap Shares

2 ASX 200 shares this fund manager thinks are trading at great value

These large industry players are good value.

Read more »

Donor donates blood in medical clinic. Beautiful European woman of 30 years sits in medical chair looking into camera and smiling.
Cheap Shares

2 ASX 200 shares with favourable risk-reward profiles

I think these two blue chips are worth a look right now.

Read more »