"We believe the iPhone 5 release could be the largest consumer product launch in history," stated Thomas Seitz, a telecoms analyst with Jefferies, in an August note to clients. While that is bolstering expectations that Apple may be the first U.S. company to reach $1 trillion in market cap, it also exposes the threat to the telecom giants.
"The earlier than expected launch of the iPhone 5 is likely to have a major impact on the [third quarter 2012] service EBITDA margin expectations for the carriers," Seitz wrote, estimating AT&T and Verizon could see profit margins fall by as much as 6%, on roughly $1 billion in iPhone subsidy expense. Seitz ultimately argues that the longer-term case for AT&T and Verizon's earnings remains intact.
Investors may also be smart to follow investor flows as a sign of what's to come in telecom. In late August, telecom stock outflows were the greatest since 2008, according to a report from Bank of America Merrill Lynch equity strategist Savita Subramanian.
"After clients poured into Telecom during the first half of 2012 and the sector's relative P/E hit all-time highs, we have observed accelerating outflows from Telecom and the other defensive sectors in the second half and a rotation into cyclicals-- most notably Industrials and Tech," wrote Subramanian.
The investor stampede may signal expectations of the dividend hit that Moffett has been crowing about amid a 2012 telecom sector rally. Subramanian highlights record post-crisis telecom sector outflows as indicative of a rotation from dividend-yielding defensive stocks to cyclical stocks.
Investors fleeing "defensives" like telecoms for "cyclicals" may be a final irony: if Moffett is right about telecoms morphing from defensive into cyclical stock plays, it's the telecoms themselves that are becoming cyclical in nature.
-- Written by Antoine Gara in New York