AT&T Stock: Cratering On The Amazon Wireless Report

Summary:

• Amazon.com, Inc. is reportedly in talks with leading telcos to offer mobile services to its Prime members, potentially intensifying competition for AT&T Inc., Verizon Communications Inc., and T-Mobile US, Inc.
• Amazon is expected to enter as a mobile virtual network operator, possibly offering low-cost or free nationwide mobile phone service.
• AT&T Inc. investors should brace for more pain, as the current pricing dynamics could change depending on the terms of the deal with Amazon.

AT&T Inc. (NYSE:T) investors were hammered today, as Amazon.com, Inc. (AMZN) was reported to be looking to offer mobile services to Prime members. Bloomberg reported that Amazon and the leading Telcos have been in discussion over the past “six to eight weeks,” as Amazon seeks an opportunity to enhance the value proposition of Prime significantly.

Notably, given Amazon’s bargaining power and intent behind the deal, investors also sent shares in Verizon Communications Inc. (VZ) and T-Mobile US, Inc. (TMUS) down south to reflect the possible intense competition from Amazon.

Amazon is expected to enter as a mobile virtual network operator, or MVNO, buying wireless service at wholesale prices for its members. However, Amazon is not likely to leverage its wireless ambitions to drive significant profitability.

In contrast, Amazon is even expected to take a loss as the leading e-commerce and cloud-computing company could “offer low-cost or potentially free nationwide mobile phone service.”

With the tech behemoth entering the fray just as the industry has rationalized its spending over the past year, it’s a highly unwelcome development for AT&T.

CEO John Stankey highlighted in a recent May conference that the company remains confident of its cost-cutting measures and free cash flow, or FCF, projections for this year.

Accordingly, AT&T is on track to achieve a further $1B in cost savings this year while also making “progress” in its plans to de-lever further by 2025.

Stankey also stressed that the company has seen “strong momentum in both consumer fixed space and wireless.” Given its efficiency gains, it has proffered the company confidence in continuing its margin expansion.

However, Amazon refuted the report about its intention to enter the wireless space, highlighting that “currently, it does not plan to add wireless.”

Notwithstanding, I think it’s justified for AT&T investors to reflect uncertainty over its execution risks for the rest of the year, as Amazon’s threat could unravel the competitive dynamics.

Does it make sense? Amazon’s estimated 170M in prime members is expected to give it significant leverage in its discussion with AT&T and its peers. Moreover, with the highly intense competition against TMUS and VZ, Amazon could drive the negotiations in its favor, knowing they would want its business.

However, it could also lead to an unhealthy price war, disrupting AT&T’s strategy, even if it successfully wins the deal with Amazon. Moreover, AT&T likely doesn’t have a choice to not compete, as it could still lose subscribers to Amazon, given the allure of the Prime membership.

As such, I think investors must reflect significant risks, as the current pricing dynamics could change depending on the terms of the deal. Coupled with the lack of a near-term growth driver given the macro challenges, AT&T investors must brace for more pain.

With T suffering the worst selloff over the past two months since it bottomed out in October, investors have likely reflected significant risks even before today’s announcement.

As such, T’s valuation remains attractive, with Seeking Alpha Quant rating it with an “A-” grade.

T’s price action also indicates that it has closed the gap toward its October lows, which could attract dip buyers that bolstered its bottoming process last year.

Hence, I see an opportunity for the Amazon announcement to shake off the “last of the weak holders,” who likely fled to the hills from AT&T Inc. stock after today’s highly unexpected announcement.

While there are likely downside risks to AT&T Inc.’s estimates, given today’s announcement, I think T’s valuation and price action suggest that it’s likely reflected.

However, the force of the selloff could still see some near-term downside for AT&T Inc. stock as momentum remains with the sellers. Therefore, I urge investors to allocate their capital wisely if they decide to add while anticipating a consolidation zone moving forward.

Rating: Buy (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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