Investors sour on Verizon, AT&T, Sprint and T-Mobile amid price cuts and spectrum auction

Investors last week dumped the stocks of Verizon Communications (NYSE: VZ), AT&T (NYSE: T), Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) in a hurry amid growing concerns that the carriers' wireless pricing battles are unsustainable long term and that rising costs of spectrum will combine with the price war to drive down carriers' profitability.

According to the Wall Street Journal, Verizon, AT&T, Sprint and T-Mobile have collectively lost $45 billion in market value since mid-November. The WSJ notes that the lost value is greater than the current market capitalization of Sprint and T-Mobile combined.

As CNN Money notes, Verizon's shares fell 6 percent last week, AT&T's stock dipped 5 percent, T-Mobile dropped 10 percent and Sprint plunged more than 16 percent. There have been multiple catalysts for the sell-off in carrier stocks.

One is the FCC's ongoing AWS-3 spectrum auction, which has already drawn more than $43 billion in provisional winning bids. That has spooked investors, not only because of the high costs that Verizon and AT&T are expected to incur in the auction, but also because of what it bodes for 2016's incentive auction of 600 MHz broadcast TV spectrum. Sprint and T-Mobile are expected to spend heavily in that auction (Sprint is sitting out the AWS-3 auction).

Another reason stocks are dropping is because of warnings from carriers, Verizon and AT&T in particular, that their fourth-quarter margins will take hits thanks to promotions they are offering to counteract those from their rivals. The larger worry among investors is that the price war is going to continue unabated into next year, dragging down carriers' profits as they chase subscriber growth and look to get customers from other carriers to switch over.

Sprint, for example, is offering to cut customers' bills in half if they switch from Verizon or AT&T through Jan. 15, though customers also need to purchase a new Sprint phone. However, Sprint is likely going to continue to be aggressive once that promotion ends as it seeks to win back market share.

UBS analyst John Hodulik thinks the price war will likely end only if regulators allow carriers to merge or the companies themselves decide to preserve profits and allow customers to leave. Those sentiments were also echoed in a research note last week from Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata, who explicitly called on carriers to let customers leave as a way to preserve margins and profitability.

Dave Carey, executive vice president of corporate services at T-Mobile, told the Journal the company's stock was probably under some pressure from the $1 billion in convertible stock it sold last week. T-Mobile has said it will use the proceeds for capital expenditures and spectrum purchases beyond what it may acquire in the AWS-3 auction.

Meanwhile, analysts at MoffettNathanson wrote in a research note that they think T-Mobile's stock is actually too cheap. They note that despite looming capital requirements, especially for spectrum, T-Mobile's subscriber growth is far outpacing the industry, its price cuts are behind it not ahead, and the company's margins will expand as it shuts down MetroPCS' legacy CDMA network next year.

For more:
- see this WSJ article (sub. req.)
- see this CNN Money article
- see this MoffettNathanson report (sub. req.)

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