Scotiabank analyst Jeff Fan argues that Verizon's higher spending will take some time to pay off
Shares of Verizon (VZ) and AT&T (T) are under pressure on Thursday as Oppenheimer analyst Timothy Horan downgraded both stocks to Perform from Outperform on valuation after the companies spent big in the Federal Communications Commission's C-band auction for 5G spectrum. Verizon pledged $45.5B to secure airwaves for faster wireless service, while AT&T bid $23.4B and T-Mobile (TMUS) bid $9.3B. Meanwhile, Scotiabank analyst Jeff Fan also downgraded Verizon to Sector Perform due to higher than expected net debt after the FCC announced final results of the completed $81B C-Band auction.
C-BAND AUCTION: Verizon has pledged $45.5B to secure airwaves for faster wireless service in the FCC's $81B auction, The Wall Street Journal's Drew FitzGerald reported. AT&T (T) bid $23.4B, while T-Mobile (TMUS) bid $9.3B, according to the report. Verizon and its rivals are enhancing their 5G services this year following the launch of Apple’s (AAPL) latest iPhone and other devices that can support the high-speed specifications, the author noted. Verizon’s need for the midrange spectrum was considered particularly acute after T-Mobile amassed a sizable cache of similar assets through its 2020 purchase of Sprint, he added.
MOVING TO THE SIDELINES: Oppenheimer analyst Timothy Horan downgraded Verizon and AT&T to Perform from Outperform, citing valuation. The analyst noted that C-Band Auction results were released and the quiet period should end March 10. Verizon bid $45.4B or about $13M per license, while AT&T won 1,621 licenses for $23.4B compared to Horan's $20B forecast. The analyst thinks Verizon and AT&T bid aggressively to catch up with T-Mobile's 5G network quality, which spent $9.3B for 142 licenses, likely coverage gaps. Horan added that "surprisingly," cable companies and Dish (DISH) spent very little.
The analyst acknowledged that this was a "must-win" auction for Verizon as it had to acquire 5G mid-band spectrum to compete with T-Mobile's network quality. However, it will take at least a year to start deploying this spectrum and revenues generated from it will take a few years, he contended. Horan believes AT&T is in a similar situation as Verizon, but with less financial flexibility. It also needs this spectrum to compete with T-Mobile and it appears that it will sell part or all of DirectTV at about $15B, or a very low 20% free cash flow yield, the analyst said.
Meanwhile, Scotiabank analyst Jeff Fan also downgraded Verizon to Sector Perform from Outperform with a price target of $59, down from $61, due to higher than expected net debt after the FCC announced final results of the completed $81B C-Band auction. The results showed that Verizon "as the market had feared" was the biggest spender in acquiring over half of all the spectrum licenses. While the "good news is the results reduced the threat of a viable fourth wireless operator," the "bad news" includes higher spending that will take some time to pay off and the fact that neither Verizon nor AT&T closed T-Mobile's "relative mid-band advantage," Fan told investors.
PRICE ACTION: In morning trading, shares of Verizon have dropped over 1% to $56.47, while AT&T's stock has slipped about 1% to $29.04.