Telecom Investors Should Be Wary of Record iPhone 5 Sales

NEW YORK (TheStreet) -- Apple's (AAPL) iPhone 5 is on track to be the fastest selling smartphone ever -- a record 2 million phones sold on the first day of pre-order last Friday -- but for wireless carriers like AT&T (T) and Verizon (VZ), the launch will serve as a key test. Are carrier stocks to remain reliable long-term, dividend-paying investments, or are they on their way to becoming trading vehicles timed to smartphone launch cycle dynamics?

Apple's newest smartphone may disrupt a strong earnings environment for wireless carriers, exposing the recent strength of AT&T and Verizon (VZ) to be driven by cyclical factors as opposed to sustainable strength. At the forefront of investor concern are subsidies that the carriers pay to Apple to sell new phones at a palatable price for consumers.

In the past, new iPhone launches have been a profit-draining proposition because carriers pay as much as $500 a phone in subsidies.

Currently, Apple is challenging a record high share price of $700 on expectations of the new phone, while wireless carriers AT&T and Verizon (VZ) sit near one-year highs. Blockbuster iPhone 5 sales could drive Apple shares, according to analysts, while carriers may be negatively impacted by subsidies in the near-term.

Already, analysts are warning that iPhone 5 subsidies may have a negative earnings impact on AT&T and Verizon, with the prospect that swarms of subsidized new users and phone upgrades hit at profitability into 2013. Meanwhile, amid iPhone 5 pandemonium and expectations that the LTE-enabled device will pull consumers to top networks and potentially away from struggling players like Sprint (S), it's the latter who may be buffeted from earnings wrecking subsidies.

"We continue to believe that Sprint will capture its fair share of iPhone sales, while its upgrade and churn rates are likely to see smaller swings in part because Sprint has not seen as much benefit over the last two quarters as AT&T and Verizon," writes Shing Yin, an analyst with Guggenheim Securities in a recent note to clients.

Because upgrades and new subscribers from other networks -- the so-called "churn" -- are likely biggest at AT&T and Verizon, Yin sees current profit margin expectations at risk. "We believe strong wireless margins have been a major driver of AT&T's and Verizon's outperformance since [the first quarter]; if margins dip significantly, we believe both stocks could give back some of their recent gains," the analyst notes.

On Monday, AT&T said it set weekend sales records on the launch of the iPhone 5. "Customers ordered more iPhones from AT&T than any previous model both on its first day of preorders and over the weekend," said AT&T in a press release. The two million iPhone 5 orders already in will begin to be delivered on Sept. 21.

Apple's sooner than-expected iPhone 5 launch date and shipments are a key theme for lowered expectations on the Wall Street in assessing third quarter carrier earnings. On Friday, Stifel Nicolaus analyst Christopher King cut his buy ratings on AT&T and Verizon as a result of iPhone 5 shipments in the quarter, which ends on Sept 30. "[We] believe potential downside to earnings estimates exist as we enter into the back half of the year," writes King, who estimates AT&T's wireless service margins may fall by 12.6% by year-end, while Verizon's may fall by 5.3%.

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