An analyst firm downgraded both AT&T and Verizon’sstock to hold on Friday on fears that the two companies were overvalued and would see lowered margins because of the success of the newly launched iPhone 5. Stifel Nicolaus analyst Christopher King wrote in his downgrade notices, that because the iPhone 5 would go on sale during the third quarter, which was earlier than he expected, the sales would likely affect margins for both companies during the entire second half of the year.
In an earlier note he wrote:
“Given our assumption of approximately $425 in carrier subsidies per handset, we believe the U.S. carrier market could be on the hook for more than $10 billion over the last three and a half months of the year alone, entirely due to the new iPhone launch.”
No wonder AT&T’s Ralph de la Vega wants to see subsidies drop.
King also noted that AT&T was trading at a price-to-earnings ratio unseen since the third quarter of 2005, before the iPhone even hit Ma Bell. Meanwhile Verizon’s shares are trading at a P/E ratio that has hit a 10-year high. Basically King is saying the stock has hit a fair price point and thinks the second half of the year may prove disappointing because of the high iPhone subsidies.
But it’s not all gloom and doom for the carriers. They get new contract customers in a saturated mobile market that will use a lot of data. Since the carriers are doing everything they can to move customers to the newer and more profitable shared data plans, the up front margin loss should work itself out over the life of those contracts.