Investors are a squeamish bunch of people at best, but they are very necessary for companies to have the money they need to expand, upgrade and do research. In a relatively stable business or where there is not much competition, things can go along quite smoothly. However, in a very competitive business, such as what the wireless mobile market has become, this can play havoc with profits and margins, driving investors to pull out and look elsewhere for a more stable business to invest their money.
Up until a couple of years ago, investing in Verizon or AT&T promised a good return on your holdings – but then T-Mobile and John Legere decided to 'shake' things up a bit with price cuts and payouts to customers in order to sway subscribers away from Verizon and AT&T. In the short-term, it is good for the customers, but not for the investor…in the long-term, it may be bad for both as companies find it difficult to find the money needed to expand and improve their wireless networks.
According to our source, last week, investors dumped Verizon, AT&T, Sprint and even T-Mobile stock due to the concern that these pieces wars will continue to go on and eat away at their profitability. The Wall Street Journal is estimating that those four companies have lost $45 billion in market value since only mid-November. CNN Money noted that Verizon stock dropped 6-percent last week, AT&T dropped 5-percent, T-Mobile lost 10-percent and Sprint plummeted more than 16-percent. There are a couple of factors contributing to this urge to sell off the shares. The FCC's ongoing AWS-3 spectrum auction is sucking money out of the wireless carriers, with $43 billion already committed. The high amount of money that Verizon and AT&T are expected to spend in this auction and 2016's 600 MHz broadcast TV spectrum auction in which Sprint and T-Mobile will be the big spenders. Another thing spooking them is the announcement that Verizon and AT&T made, warning of their lower fourth quarter margins taking a hit because of all of the discounts and promotions flying around. Dragging them down a quarter is one thing, but investors fear this will be an ongoing way of doing business, and they want no part of a price war.
UBS analyst John Hodulik said that the only way these price wars can end is by allowing carriers to merge – squashing competition – or for the carriers to stand firm and simply allow customers to leave – thereby preserving margins and profits…and neither scenario sounds likely. Verizon stood their ground for over a year, but they finally succumbed and joined in as they saw their churn rate rising. Meanwhile, analysts at MoffettNathanson believe that T-Mobile's stock price is too low and they foresee them in good shape because they already cut their prices, their subscriber growth rate is better than the others and its margins will grow after they rid themselves of the MetroPCS CDMA network next year.
Please hit us up on our Google+ Page and let us know what you think about the price wars and if you have jumped to a new carrier…as always, we would love to hear from you.