MoffettNathanson downgraded both Verizon and AT&T, saying shares of both companies "have very substantially outperformed" in recent months despite major challenges in the U.S. mobile market.
"Telecom stocks have enjoyed an almost pitch-perfect backdrop over the past six months, with a strong dollar, falling interest rates, and falling risk appetites," MoffettNathanson analysts wrote in a research note. "In the early part of the year, Verizon and AT&T rose sharply even as the market sold off. Perhaps more surprisingly, the Telecoms have continued to perform well even as the market has rebounded from its February trough as risk appetites expanded, tracking lower expectations for further rate hikes."
That rebound still faces stiff headwinds, though, the firm noted. Device sales are slowing in a U.S. market where smartphone penetration is plateauing and consumers are holding on to their devices for longer than ever. And ARPUs are stabilizing as competition increases and as EIP and lease accounting moves some wireless carrier service revenues into the equipment column.
"With all that in mind, we just can't quite get to valuations for the large-cap TelCos that support our current ratings," the analysts continued. "We are therefore lowering our outlook for the Wireless sector to Neutral. We are downgrading Verizon from Buy to Neutral, and AT&T from Neutral to Sell."
The firm said it's more optimistic about Verizon's stock partly because the nation's largest carrier has largely maintained its subscriber base without launching aggressive price-cutting campaigns as some other carriers have. And it said Verizon's mobile video strategy "is more promising than widely appreciated."
But real questions remain about the value of AT&T as it tries to leverage its own mobile video play following its acquisition of DirecTV.
"Our sum of the parts valuation for AT&T remains meaningfully below the stock's current trading range," MoffettNathanson analysts wrote. "Real growth metrics are much weaker than they appear on the surface. As we enter the back half of this year, AT&T will begin to anniversary their new segment reporting, and the weak organic growth rates of underlying businesses will be much more apparent. Recent commentary about the company's 'success' in creating a quad play bundle with DirecTV only underscores our concern."
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