T-Mobile Pushes Back After SpaceX Spectrum Deal Triggers Telecom Selloff

Dow Jones
Yesterday

Sometimes investors like to sell first and ask questions later. That might not always be the best approach, but it can create opportunity.

Take Friday. T-Mobile stock dropped more than 13% to $148.58 after SpaceX announced plans to acquire more wireless spectrum, increasing the likelihood that Elon Musk's rocket and artificial-intelligence company creates a fourth mobile wireless provider in the U.S.

Fears that SpaceX and its Starlink space-based broadband product could disrupt traditional telecom have swirled for months. Friday was just the latest example of investors' mounting fear -- and how it can ultimately lead to buying opportunities.

Pivotal research analyst Jeff Wlodarczak joked about wireless telecom players cutting their dividends. T-Mobile shares yield 3.2%, according to FactSet. Verizon yields 6.8%, and AT&T stock yields 5%.

"We are kidding about telco dividend cuts (in the short and medium term), but Elon appears to have created a legitimate new low-cost carrier aimed at the rural and suburban customer initially, bundled with the dish already on the roof," he wrote on Monday. "Our view is that Starlink mobile reaches a low-double-digit share of U.S. wireless over our forecast period (13% in 10 years)."

It will take a while for SpaceX to chip away at traditional businesses. Raymond James analyst Frank Louthan upgraded T-Mobile stock on Monday to Buy from Hold, and established a $170 price target.

"We believe the recent fears over competition [from] SpaceX are overblown, as they are three-plus years away from becoming reality, and competition from larger players is nothing new to T-Mobile," wrote Louthan. "As such, the recent pullback on competitive fears has created a buying opportunity."

Wall Street seems skeptical that SpaceX can upend the wireless industry anytime soon. (Citi analyst Michael Rollins suggested investors buy the dip in wireless stocks on Friday.)

Beyond the time it will take to win market share, SpaceX still doesn't have enough spectrum -- essentially the pipes that carry wireless data. That could lead SpaceX to look for a partner among the traditional players.

The wireless industry also seems to believe the SpaceX threat is overdone. T-Mobile Chief Technology Officer John Saw penned a missive on why spectrum alone isn't enough to compete in mobile communications.

"Spectrum is just the starting point," he wrote, adding that SpaceX has accumulated about 80 megahertz of spectrum, while T-Mobile has closer to 400 megahertz. (The amount of spectrum is proportional to network capacity.)

Saw added that SpaceX's satellites are far away, creating challenges for broad-based cell coverage. Terrestrial signals also penetrate buildings and obstacles more easily, offering better indoor coverage. T-Mobile and its peers have also established stores, customer service, and distribution.

"I have tremendous respect for what SpaceX has accomplished in space," wrote Saw. "But having spent decades building wireless networks here on Earth, I can tell you there's a big difference between owning spectrum and delivering a great mobile experience to millions of customers."

SpaceX, of course, presumably knows much of this and appears determined to compete. It might take longer and be harder for SpaceX than investors assume. What's more, the wireless industry won't sit idly by and let it happen.

Friday's stock declines of between 8% and 14% for the three wireless carriers T-Mobile, Verizon Communications, and AT&T show that investors are clearly concerned. Investors might not be assuming SpaceX destroys the industry -- just that SpaceX shaves growth off of the existing players. Sometimes that alone is enough to change valuation multiples.

T-Mobile stock currently trades for about 11 times earnings expected over the coming 12 months, according to FactSet. That's the lowest price-to-earnings ratio of the past 10 years.

T-Mobile stock was up 1% in premarket trading Monday, while S&P 500 and Dow Jones Industrial Average futures were up about 0.1%. AT&T and Verizon shares were up 0.1% and 0.3%, respectively.

SpaceX stock was up 0.7%.

 

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