US Wireless Carriers: First-Quarter Competitive Intensity Looks Like a Small Bump

Verizon Communications VZ indicated at an investor conference that wireless competition has been more aggressive than usual thus far during the first quarter. The firm’s shares slid 7%, giving back all the gains from a sharp rally over the prior week. AT&T T and T-Mobile TMUS shares also dropped about 3%.

Why it matters: Our narrow moat ratings on the Big Three US wireless carriers largely rest on efficient scale within the industry, which we expect to prevent irrational competition. Indications of increased competitive intensity warrant careful consideration.

• Verizon claims competitors' holiday promotions extended into the first quarter, creating a challenging competitive environment that will hurt customer additions. The firm has launched new promotions recently to counter its rivals.
• Similarly, AT&T shared that January’s customer metrics were weak, but that it responded quickly and February returned to normal. Also in early March, T-Mobile seemed confident that its first-quarter and full-year customer additions would meet or exceed expectations.

The bottom line: We like seeing quick competitive responses among the carriers, reinforcing the futility of using promotions to gain share over the long term. Our narrow moat ratings and fair value estimates on Verizon ($53 per share), AT&T ($26), and T-Mobile ($210) are unchanged.

• Verizon believes competition from the cable companies is stable. However, the firm touted its benefits from supplying network capacity to Comcast CMCSA and Charter Communications CHTR, which we think is a mistake. We’d hate to see a competitor bid aggressively to steal this business and further arm these rivals.
• Importantly, both Verizon and AT&T have reiterated their full-year customer addition, growth, and profitability forecasts despite the tough competitive environment. The biggest risk we see is that the carriers may stubbornly chase customer targets if industry growth slows suddenly.