Telecom Stocks Takes a Hit Amidst Reports of Amazon’s Potential Entry into Wireless Market

Telecom giants AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), and T-Mobile US, Inc. (NASDAQ: TMUS) experienced a decline in stock prices today following surprising news. Bloomberg reports that Amazon.com, Inc. (NASDAQ: AMZN) is exploring the possibility of entering the wireless market by offering nationwide mobile phone service to its Prime members, either for free or at a discounted rate.

Amazon has been engaging in discussions with Verizon, T-Mobile, and DISH Network Corporation (NASDAQ: DISH) to secure a favorable wholesale price for the service. The plan is to provide Prime members with wireless service for as low as $10 per month or even for free, as an added incentive to join and maintain their membership.

Investors view Amazon’s potential entry into the wireless service industry as a threat to established telecom companies. As of 1:19 p.m. ET, AT&T stock declined by 4.3%, Verizon stock dropped by 3.1%, and T-Mobile stock experienced a 6.8% decrease.

So what

The report reveals that discussions between Amazon and the telecom companies have been ongoing for six to eight weeks, although it remains uncertain if an agreement will be reached. T-Mobile has stated that it is not engaged in talks with Amazon concerning the inclusion of its wireless service in the Prime membership.

On one hand, it appears reasonable for Amazon to pursue such a benefit for Prime members, considering the company’s existing perks such as free Prime Video streaming. These benefits aim to encourage more people to join the $139/year membership service and enhance customer retention.

However, this news comes at a time when Amazon has been actively reducing costs, particularly in unprofitable business lines. Offering a generous perk like free or heavily discounted wireless service may come as a surprise for a company focused on improving its bottom line and reducing wasteful expenditures. Moreover, Amazon Prime already boasts significant market penetration, with an estimated 59% of U.S. households already subscribed.

This is not the first instance where Amazon’s moves have caused disruption within an industry. The acquisition of Whole Foods impacted grocery stocks, while the purchase of PillPack led to a decline in pharmacy stocks. However, Amazon did not ultimately become a significant player in those industries, and the sell-offs were ultimately unjustified.

The telecom industry is already highly competitive, and it is unlikely that the three major telecom companies would strike a deal with Amazon that significantly undercuts their prices. Conversely, shares of Dish Network rose in response to the news, as the company could potentially benefit from a partnership with Amazon.

Verizon and AT&T have been facing challenges in achieving growth due to declining landline revenue, sluggish equipment sales, and market pressures. Additionally, both companies are likely losing market share to T-Mobile, which currently boasts the largest 5G coverage and the fastest 5G network, as indicated by recent surveys.

T-Mobile’s stock experienced a more significant decline than AT&T and Verizon. If Amazon enters the industry, T-Mobile may face greater losses than its peers due to its higher stock valuation. Conversely, AT&T and Verizon are already priced as no-growth stocks with low single-digit price-to-earnings ratios. Many investors hold these stocks primarily for their dividends.

Now what

Today’s sell-off appears somewhat premature, and investors should not hastily sell telecom stocks based solely on this news. The potential deal may not come to fruition, and the leaked information about the talks could be a tactic to pressure the telecom giants against engaging with Amazon, as investors have expressed their disapproval of the idea.

While this news does not necessarily make these stocks a buy, Verizon and AT&T face their own challenges. Selling these stocks solely based on today’s news may prove to be a mistake.