Not even a month into 2024, America’s two big legacy telecom companies—
AT&T
and
Verizon
Communications—are having very different years.
After the two traded similarly for years, Verizon has suddenly gained an edge on its rival in the first few weeks of the year. Its stock has gained 9.5% this year through Wednesday’s close, soundly beating the
S&P 500’s
2.1% gain and AT&T shares’ 0.6% decline.
The difference extends beyond price action, however. Verizon reported stronger-than-expected subscriber additions and revenue for its fourth quarter earlier this week, with earnings matching estimates. On Wednesday, AT&T posted mixed fiscal fourth-quarter results: The telecom added more subscribers than expected and delivered higher revenue, but its per-share earnings missed the mark. Both stocks slumped afterward, with Verizon stock falling 2.4% and AT&T down 3.5%.
Wall Street also seems to be distinguishing between the pair, too, as Verizon began the year with a pair of optimistic upgrades. Now more than half of the 27 analysts tracked by FactSet now rate Verizon the equivalent of Buy. Only about 40% of analysts are bullish on AT&T shares, though the stock did get one upgrade last week.
The divergence in the two stocks is nonetheless surprising, when they still have plenty in common. Investors are worried about the two telecoms’ debt loads, dwindling landline customers, and the cost of investing in wireless networks. Both companies notched losses for the whole of 2023, although AT&T’s decline was much steeper.
In addition, they are facing a potential liability related to lead levels in their legacy cables after a Wall Street Journal investigation highlighted the problem this past summer—sending AT&T stock to a 30-year low in July. Industry group USTelecom has previously stated that “many considerations go into determining whether legacy lead-sheathed telecom cables should be removed” and that the association is ready to engage constructively on the issue.
Over the past five years, AT&T and Verizon have both fallen more than 25%—when the S&P 500 has soared some 83%. The result is both stocks are cheap. AT&T trades at just under seven times forward earnings, while offering an attractive 6.7% dividend yield. Even with Verizon’s recent gains, its 6.4% dividend yield is the highest in the Dow Jones Industrial Average, and its stock trades at just over nine times forward earnings.
So investors may be forgiven for wondering why, after trading in tandem over the long run, investor sentiment seems to have shifted in Verizon’s favor.
There are a few factors that could account for Verizon’s recent edge, aside from its stronger fourth-quarter numbers.
As KeyBanc Capital Markets Brandon Nispel notes, Verizon and
T-Mobile
have pushed through recent price increases that should benefit average revenue per user and provide upside going forward. He is bullish on Verizon stock and sidelined on AT&T.
He says various key performance indicators are likely to turn positive for Verizon this year, while “AT&T’s network trails Verizon/T-Mobile and AT&T’s 5G strategy is unclear, and Verizon has higher quality free cash flow compared to AT&T.”
Some industry watchers are also concerned about the transition period around AT&T’s deal with
Ericsson,
announced in December. The latter has a five-year contract to build an OpenRAN technology-based network that will carry 70% of its wireless traffic in the U.S. by late 2026. AT&T’s spending could reach nearly $14 billion over the life of the project.
Then there’s the fact that the industry’s competitive backdrop is relatively benign right now, with little in the way of pricing wars—a positive situation for the overall group, but unlikely to last forever.
Moffett Nathanson’s Craig Moffett warned Wednesday that it would be a mistake to expect all the sector’s players to be winners this year.
The market is unwisely “viewing the wireless market as a rising tide to lift all boats and not a zero-sum game where one player’s gain is another’s loss,” he writes. “Forgive us for being skeptical about the rising tide argument, but we can’t help but worry that the numbers just don’t add up.”
He points to the recent fourth-quarter results, which shows Verizon is taking market share. The company reported a 12.5% increase in year-over-year postpaid phone gross additions, while AT&T saw a 3.6% decline.
“We won’t know the full picture of share of gross additions until after T-Mobile and Cable report results, but it is clear that AT&T has lost ground,” Moffett adds.
Therefore, it’s understandable why Verizon appears to be in the spring of hope, while AT&T remains stuck in the winter of despair, to borrow from Charles Dickens. Of course, Verizon and AT&T shares could still return to their previous pattern.
Still, the greatest expectations are likely reserved for T-Mobile, which investors have long favored the most of the group.
Write to Teresa Rivas at [email protected]
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