AT&T (T) competes with both Verizon (VZ) and Sprint (S) in the mobile business, with over 45% of its stock value stemming from mobile phones and plans by our estimates. Comparatively, we estimate that roughly 42% of Verizon’s stock value is generated by mobile phones and plans and close to 43% for Sprint. Our price estimates for Verizon and Sprint are within 6% of current market values, while we remain roughly 30% above market value for AT&T.
AT&T has historically lagged behind its main competitor Verizon when it comes to investing capital in upgrading and improving its wireless network. The load on AT&T’s network increased tremendously in 2007 with the introduction of Apple’s (AAPL) iPhone, and the company was a little late in increasing spending on its wireless infrastructure. As a result, Verizon shot past AT&T in total subscriber count in 2009.
However it seems that while Verizon’s spending has come down slightly, AT&T has accelerated its wireless capital spending significantly. As per our estimates, AT&T should match Verizon in terms of capital expenditure per subscriber in 2010. The chart below depicts the trend in this metric over the past four years.
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Key Incentives for AT&T to Increase Capital Expenditures
AT&T has been continually criticized for the quality of its network, which can be partially attributed to heavy data usage from iPhone users for which it appears AT&T’s network was not prepared. The data usage has exploded in the last couple of years and, consequently, AT&T has been upgrading its 3G networks to improve data access continuity and data speeds. Additionally, the roll-out of its next generation 4G long term evolution (LTE) network has necessitated additional capital spend.
Modify the chart below to see how changes in capital expenditure could affect AT&T’s stock value.
Will Verizon’s Capital Expenditure per Subscriber Continue to Decline?
We believe that it is unlikely that capital expenditures for Verizon will decline by any significant amount, given the fact that the carriers will continually invest in network upgrades and maintenance in order to improve data speeds and encourage more subscribers to attach data plans. Higher attach rates will drive greater data revenues.
Modify the chart below to see how changes in SMS and data revenue per subscriber could affect Verizon’s stock value.
However, given that Verizon has already launched LTE in many of its markets, its capital expenditure could potentially moderate in future years as it nears completion of the network.
Modify the chart below to see how a reduction in capital expenditure below our baseline forecasts could affect Verizon’s stock value.
Disclosure: No position