Telecom's Big Three: Room for Growth?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last month, Verizon customers were fuming over the recent revelation that the company was dutifully turning over customer phone records in compliance with government orders. It was also reported that AT&T's second-quarter 2013 adjusted earnings per share missed estimates, coming in at $0.67. Analysts believe the company’s performance was hurt by steeper cost of service and sales. Operating income decreased 10.3% year over year to $6.1 billion, while operating expenses increased 4.9% year over year to $25.9 billion.
Even so, the three leaders are each overcoming their struggles, though with vastly different strategies. Most notably, Sprint is in the middle of trying to recoup from particularly negative press revolving around its ineffective launch of its 4G LTE. As it attempts to maintain momentum, I see both AT&T and Verizon taking a more solid lead in the industry.
Verizon not going anywhere
Let's first acknowledge that Verizon has been a mainstay and will continue to be at the top of its class in terms of influence and market share. Once it began offering Apple’s iPhone on its networks, it saw new subscribers jump by more than 2 million in two quarters. By Q1, Verizon had sold a whopping 5.2 million iPhones, more than double that of AT&T’s sales - not to mention AT&T had a paltry gain of only 800,000 new customers. With such a healthy lead, its operating costs are also promising. It’s gross margin is currently at 58.63%, compared with the other top two, AT&T at 54.73% and Sprint at 43.54%.
Moreover, the news about "project Snowden" didn't seem to hurt the company's stock performance. When it was announced, Verizon's stock price rose 3.46% throughout the week, earning it the title of 'best-performing stock' in the Dow Jones Industrial Average for one day.
What about AT&T?
Likewise, AT&T has sported some pretty impressive numbers the first few quarters. It generated nearly $32 billion in revenue, representing a gain of $575 million, or 1.8%, compared to last year. AT&T added 632,000 wireless customers in the reported quarter, totaling 107.9 million. This was primarily due to Apple iPhones and Google Android-based phones, which pushed sales beyond 6.8 million units.
I appreciate AT&T's movement as well. In late 2011, the company failed to purchase T-Mobile. But rather than rest and lick its wounds, it searched out other ways to acquire spectrum and customers, most recently announcing its intention to acquire Leap Wireless for $1.2 billion. The deal includes the assumption of Leap's net debt of approximately $2.8 billion and works out to $15 per share. Even with the assumption of debt, the deal doesn't look too expensive, especially since AT&T will be better able to monetize the additional spectrum than Leap. Still, AT&T has a long way to go to upgrade its network and, in that area, lags far behind Verizon.
And then there's Sprint...
Sprint has had a rough time. Last quarter the company posted a loss of about 29 cents per share. It tried to calm fears by emphasizing that it wasn’t as bad as last year. Even so, Sprint improved year-over-year revenue by about 7%, totaling $7.2 billion. It also reported an additional million subscribers during last quarter, making its total customer base about 56 million. With such numbers, one would expect slightly better news.
Most recently, Sprint has been in the news for (sort of) bringing its LTE service to New York City -- just not for everybody. For citizens in Brooklyn and Bronx, the service will be fully connected by July 30. For the rest of New York, including Queens, Staten Island, and Manhattan, Sprint says these should roll out "in the coming months." This announcement was made last September, incorporating New York and 100 other cities slotted for the 4G LTE network. Nearly a year later, people are wondering, and investors are growing listless.
The million dollar question
So the question on everyone’s mind is – with mobile technology expanding as it is, record sales of devices, and the app market growing by the second so consumers can do more than ever on their phones, why aren’t the carriers cashing in?
As previously mentioned, I see movement from the first two. Verizon will undoubtedly remain a strong force. Currently, the stock is at $50.28 with a forward P/E of 92. Investors could perhaps wait for a more attractive entry point, but the stock is still a performer.
Likewise, AT&T has the strength to continue. Revenues have increased 2.6% year-over-year, and that growth can be attributed to efficient network operations and an expanding broadband segment. Some may look at the increase in operating expenses increasing 4.9% year-over-year to $25.9 billion as a flag. However, this can be attributed to positioning, and its expanding spectrum and consumer base is the kind of positioning that will keep it competitive.
It seems only Sprint, then, is left holding the bag. The company's problems stem from four-straight quarters of subscriber waning, a resurgent T-Mobile doing surprisingly well at national and international branding, and, of course, the two previously mentioned goliaths. The slow deployment of its LTE network makes Sprint even less competitive at a time when the carriers are scrambling to grab a shrinking base of customers. Sprint is still the smallest iPhone seller among the major carriers. It also, as shown in New York, has a lagging network.
As smartphone sales continue to explode, and mobile usage is expected to grow by a factor of 16 over the next five years, all companies who can capitalize on this kind of growth stand to benefit. It is my prediction that Verizon will see the most significant growth in the coming quarters while AT&T will remain steady. Sadly, Sprint's actions (or half actions) seem to be more 'struggle' than 'strategy.'
Bill Edson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!