iPhone 5: The Carriers on Pre-Sale
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Apple’s (NASDAQ: AAPL) new iPhone 5 already setting new records for early sales, the wireless providers continue to be my preferred way to play the release. AT&T (NYSE: T), Verizon (NYSE: VZ) and Sprint Nextel (NYSE: S) each offer a different investment profile based on different service offerings, with each having some noteworthy advantages and disadvantages. Ultimately there is merit in each company as the battle for wireless supremacy will likely be a solid driver for all three providers.
The iPhone’s New Clothes
Personal opinions aside, it's hard to argue with the global success of the new iPhone 5. As consumers clamor for the new device’s larger screen, faster processor and updated functionality, it seems to be the “cool” factor that is really driving sales. As mounting evidence shows that customers are migrating to the iconic smartphone from both competitors and year-old iPhone 4S models, Apple seems to have found a way to drive demand that transcends functionality. Sales projections continue to grow and the big three carriers are reaping the rewards.
The 3 D’s: Depth, Density & Data
Of the three iPhone wireless carriers, Verizon leads the pack in terms of the depth of its network coverage. The company projects that it will have the ability to offer 4G LTE coverage to 260 million people in nearly 400 markets by the end of the year. This depth means that Verizon may be in the best position to benefit from the popularity of the new iPhone.
Not to be counted out, however, is the density offered by AT&T. In those markets where AT&T does offer 4G LTE coverage, its network has greater density and, therefore, higher speeds than is typically available from Verizon. Additionally, the company recently added coverage in new markets prior to the launch in Detroit, Pittsburg and Seattle. AT&T has shown significant talent in client retention ever since the release of the original iPhone which will likely be important going forward. Randall Stephenson, AT&T’s CEO, said: “We’re having record sales with iPhones, and across the board, the portfolio of all the smartphone business is hot.” The company recognizes the need to continue to build out its infrastructure and is taking the needed steps.
Finally, is the data play offered by Sprint. The last entrant to the iPhone carrier war, Sprint continues to be the only company that offers an unlimited data plan to new subscribers. Given the increased data usage associated with LTE networks, and the new functionality that allows FaceTime video calls to be made across the wireless network, as opposed to only in Wi-Fi mode, data is likely to play an increasingly important role in consumer choices. Sprint’s CEO confirmed that the company is also experiencing strong sales of the iPhone 5: “I don’t know how it compares with our competitors, but I would expect it’s doing well. I’m just glad we have it.”
Since the release of the new device, Sprint has outperformed its peers, but all three are up. The performance figures are likely to change as more preliminary sales data becomes available from each carrier. Overall, all three carriers should benefit from the release and have the potential to make solid core holdings.
If pressed to pick one of the three, Verizon looks the strongest at current levels. Both AT&T and Sprint have less attractive P/E ratios, although Verizon is not perfect at 45. The metric that give Verizon the slight edge is its operating margin of 18% relative to 14% for AT&T and 1% for Sprint. Given the potential impact of high subsidies paid to Apple with the bulk of iPhone 5 sales, efficiency may prove an important edge. AT&T is still a reasonable long, with Sprint being the most speculative of the group. Overall, all three stocks have appeal, but if you are choosing one, Verizon has the most potential from here.
Foolish Bottom Line
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.