What happened
Telecom stocks including AT&T (T -0.18%), Verizon (VZ -1.17%), and T-Mobile (TMUS 0.03%) were all pulling back Friday on some surprising news.
According to Bloomberg, Amazon (AMZN -1.66%) is considering entering the wireless market, as it's held discussions about offering nationwide mobile phone service to Prime members, either for free or at a discount.
Bloomberg said that Amazon is negotiating with Verizon, T-Mobile, and Dish Network (DISH) to get a low wholesale price for service that it could then turn around and offer to Prime members for $10 a month or even free as an incentive to join and stick with the membership program.
Not surprisingly, investors saw Amazon's push into wireless service as a threat to the three major telecoms, and as of 1:19 p.m. ET, AT&T stock was down 4.3%, Verizon stock was off 3.1%, and T-Mobile stock was down 6.8%.
Image source: Getty Images.
So what
According to the report, Amazon has been holding talks for six to eight weeks, though it's unclear if a deal will be made. T-Mobile said it was not in talks with Amazon about including its wireless service in Prime.
In some ways, it makes sense that Amazon would pursue such a benefit for Prime members as the company offers perks like free Prime Video streaming for members, which it believes entices more people to join its $139/year membership service and improves retention.
However, the news comes at a time when Amazon has been aggressively cutting costs, especially on unprofitable business lines, and giving away a lavish perk like free or heavily discounted wireless service would be surprising for a company looking to boost its bottom line and cut waste. Additionally, Amazon Prime has already deeply penetrated the U.S., and it would seem like the company has relatively few members to gain from such a move. According to estimates, roughly 59% of U.S. households are already Amazon Prime members.
This also isn't the first time we've seen a move like this from Amazon shake up an industry. Grocery stocks plunged after the tech giant acquired Whole Foods, and pharmacy stocks sold off on the news it was buying PillPack, though neither one of those moves ended up making Amazon a significant player in those industries. In other words, those sell-offs were unjustified.
The telecom industry is already highly competitive, and the three major telecoms seem unlikely to make a deal with Amazon that would significantly undercut them on price. Shares of Dish Network rose on the news as it could be a beneficiary from such a deal with Amazon.
Verizon and AT&T have been struggling to grow for years as landline revenue has dried up, equipment sales have been slow, and macro headwinds have pinched consumers. Additionally, both companies have to be losing market share to T-Mobile, which has the most 5G coverage and the fastest 5G network, according to recent surveys.
T-Mobile stock, however, fell further than AT&T and Verizon; the stock may have more to lose if Amazon enters the industry than its two peers since its stock trades at a much higher valuation.
AT&T and Verizon, on the other hand, are already priced like no-growth stocks with single-digit price-to-earnings ratios, and most investors own those stocks for their dividends.
Now what
Today's sell-off seems a little too preemptive; investors shouldn't rush to sell these telecom stocks, since a deal may not materialize. After all, the news of the talks was leaked perhaps to pressure the big telecoms against making one, as investors clearly don't like the idea.
While that doesn't necessarily make these stocks a buy, as Verizon and AT&T have their own challenges to deal with, selling these stocks just on today's news seems like a mistake.
