The Ratings Game: Verizon faces ‘lose-lose’ situation amid aggressive AT&T promotions, analyst says in downgrade


AT&T’s Inc.’s aggressive wireless promotions could put Verizon Communications Inc. in a “lose-lose” situation, according to an analyst.

When AT&T

launched attractive promotional offers late last year in an attempt at retaining existing subscribers, there were questions about whether the company could maintain these deals for a sustained period of time. But after AT&T posted better-than-expected wireless results last week, showing both subscriber growth and margin upside, the company “will likely feel less pressure now to change course,” MoffettNathanson analyst Craig Moffett reasoned.

See also: AT&T earnings, revenue rise as company sees some recovery from COVID-19

That’s not good news for Verizon
according to Moffett, as sustained promotions from AT&T could force other wireless carriers to follow suit. Verizon’s subscriber trends have suffered as the company adopted a “wait-it-out” approach to AT&T’s promotions thus far, but now the company is in a predicament, he said.

“[I]f Verizon now concludes that AT&T’s promotional stance is to continue, they are faced with a lose-lose choice,” he wrote. “Continue to stand by and their growth will suffer further. Respond, and their growth will recover, but their profitability will decline. There are no good options.”

There are already signs that AT&T’s approach is leading to lower wireless prices elsewhere in the broader industry, which could pose more problems for Verizon. Comcast Corp.

recently lowered prices for its family plans, meaning that the company’s “unlimited service is now cheaper than, or at least on par with, Verizon’s service for every size plan,” Moffett wrote.

He still has questions about whether Comcast can make money through its new pricing, and about the “durability” of AT&T’s margin performance given its promotional stance, but he also worries that “a period of greater competitive intensity now looks more likely.”

Accordingly, he downgraded Verizon’s stock to neutral from buy Tuesday, arguing that several components of the bullish view he laid out in a December upgrade no longer perfectly apply.

For one, while he continues to think that Verizon will be able to grow average revenue per user (ARPU) this year by driving upgrades to unlimited plans and getting subscribers to pay for Disney+ through a partnership arrangement, there is also “greater risk of a forced response to AT&T’s promotionality that could hurt ARPU.”

Verizon shares are off 0.9% in Tuesday morning trading.

Moffett sees other reasons for hesitation as well. Back in December, he had expected Verizon to get “more spectrum for less” in a crucial auction for mid-band wireless spectrum, a prediction that “couldn’t have been more wrong” as aggressive bidding in the auction drove up prices and left Verizon with a “badly battered” balance sheet.

Additionally, although Verizon is a “cheap stock” still, he sees it as “less so” now that the company had to spend handsomely on the spectrum needed to build out its 5G network. And even with Verizon’s big spectrum hauls, it will take time before the company can access the new spectrum and incorporate it into its network. That gives an advantage to T-Mobile US Inc.
which already had a substantial amount of mid-band spectrum before the auction and has begun deploying it.

Read: AT&T’s transition to 5G means huge upfront costs. And it needs HBO Max to succeed.

“AT&T lags not only T-Mobile, but also Verizon, in densifying their network for 5G,” Moffett continued, and he opted to keep his sell rating on AT&T after some consideration. Despite expectations that AT&T faces easing comparisons over the next six months, he voiced “concerns about AT&T’s weak positioning in 5G” and “reservations about their earnings quality/accounting changes in Q1.”

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