What happened
At least one Wall Street analyst believes the business climate for wireless telecom companies is improving. The resulting upgrades are giving a lift to the two stocks he specifically mentioned, as well as another company that needs a strong telecom market to succeed.
Shares of AT&T (T 1.02%) and Verizon Communications (VZ 1.17%) were up by as much as 3.4% Tuesday, and shares of AST SpaceMobile (ASTS 1.83%) were up as much as 4%, on hopes for better days ahead for the wireless sector.
So what
It has been a tough year for telecoms. Shares of Verizon and AT&T are down 13% and 20%, respectively, year to date on concerns including competition, industry structure, and higher interest rates.
But Citi's Michael Rollins sees an improving outlook up ahead, and says there is a "more constructive investment case" for large telecoms. Competition between wireless providers shows signs of stabilizing, and improving free cash flows should allow companies to reduce their net debt and support their continued payouts of strong dividends.
And longer device upgrade cycles mean the companies will have less of a need to subsidize new phone purchases, which will help their profitability.
Rollins also thinks investors are overly worried about how much large telecoms will need to spend to replace lead-covered cables, saying the market "may be discounting more than full-remediation cost scenarios" at current prices.
Rollins upgraded both Verizon and AT&T to buy from neutral.
AST SpaceMobile was not involved in the analyst's action, but the start-up telecom is going to need a healthy, vibrant wireless market to be successful. The company is looking to disrupt the big telecoms by building a satellite constellation that would allow ordinary, store-bought smartphones to call each other around the globe without the signals going through cell towers.
Its technology is still in its early stages, and AST has a lot of expensive work to do to build its network. The only chance the company has to succeed is if the wireless market remains rational and pricing remains strong.
Now what
There are two very different kinds of stocks in this picture, and very different investment cases. For Verizon and AT&T, income-oriented investors are willing to accept more modest growth as long as the dividend yields remain substantial. Both Verizon and AT&T currently yield more than 7%.
Given their respective debt loads and the intensity of the competition in the space, there has been some worry that their current payouts are unsustainable. Rollins' optimism offers a welcome counterargument.
AST remains a high-risk, but potentially high-reward, type of investment. There is no guarantee the company will be able to build the network it envisions, and no assurance that customers will subscribe even if it does. But the more industry trends move in AST's direction, the better the company's chances of succeeding.
Rollins' upgrades give those interested in Verizon or AT&T another reason to buy in. AST's prospects will remain uncertain for some time, but it could work as a speculative investment within a well-diversified portfolio.
