NEW YORK (TheStreet) -- An unexpectedly high level of bidding for a new tranche of wireless spectrum being sold at auction by the Federal Communication Commission is great news for certain stocks.
The demand for spectrum at the Federal Communication Commission's AWS-3 spectrum auction has surpassed analysts' highest estimates. As of now, there have been more than $37.8 billion of spectrum license bids, far more than the $15 billion predicted by telecommunications research firm MoffettNathanson. BTIG research expected the spectrum licenses to sell for $1 per MHz, but they have been selling for more than $1.50per MHz; paired spectrum has been selling for around $2.00 per MHz.
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Those companies that are already sitting on a lot of spectrum are more valuable now. DISH Network (DISH) is the clearest winner as a result of this auction. It is sitting on a mountain of spectrum that now is worth even more than its satellite service. The stock has reflected this valuation upgrade, having risen 30% in the past month and 25% since the auction started on Nov. 13.
We can also conclude from this auction that the wireless business as a whole is even more capital intensive than we thought it was. The primary bidders in this auction are AT&T (T) and Verizon (VZ) . T-Mobile US (TMUS) is the only other major wireless carrier participating, but it's likely just picking up some regional fill-in licenses. What AT&T and Verizon's spectrum spending sprees are telling us is that major wireless carriers have to keep paying for more spectrum to keep their wireless businesses up to date. On top of that, growth in the wireless industry has slowed down from rate-plan competition. The wireless business isn't very profitable right now.
"AT&T (T) and Verizon (VZ) would have to increase revenues on a per subscriber basis by about $1.50 per month for every man, woman, and child in America in order to earn a minimal return over this latest round of spectrum," said Craig Moffett, senior research analyst at MoffettNathanson.
Both AT&T and Verizon are down only about 2% to 3% since their peaks at the beginning of the auction, on Nov. 13. A further decline of 2% to 3% is likely in order. Both companies will need to take on more debt to finance their spectrum license buying since neither has the cash to afford it. These wireless giants are bidding at least a combined $20 billion more on spectrum than analysts originally estimated. $10 billion apiece is about 5% of their market caps. Combined with the revenue growth slowdown, it wouldn't be surprising to see each stock trading 5% to 8% below what they were trading at the beginning of the auction.
Selling or even shorting Verizon and AT&T could be good plays right now. Any wireless service company that requires the use of spectrum could be a good short right now as it would require more capital or fees to use the spectrum, thus bringing down its bottom line.
Buying shares of companies that already have a lot of spectrum assets is a good thought, but it can be tricky. For many of those companies, such as DISH, the shares already have appreciated a lot since the auction started. And because of FCC regulation, valuing spectrum licenses isn't straight forward.
"It's dangerous for investors to assume that auctions like this can be turned into valuation comps for companies like DISH," said Moffett. "There's a tendency to view spectrum as a commodity like oil or gold but spectrum isn't freely traded like those. It's a highly regulated market, and there's a heavy hand of government in every transaction. The assumption that DISH could sell its spectrum today for more than yesterday is an assumption that it can sell its spectrum at all."
If DISH isn't able to sell its spectrum, then the 30% rise in share price is likely overdone. AT&T and Verizon might not be able to buy DISH's spectrum from ownership restrictions and/or if the FCC deems it not in the public's best interest. T-Mobile US and Sprint (S) are not in the market for DISH's spectrum, according to Moffett.
"T-Mobile and Sprint wouldn't be interested in Dish's spectrum because they need low band spectrum, while Dish only has high band spectrum," said Mr. Moffett.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, the author held no positions in the stock mentioned.
TheStreet Ratings team rates DISH NETWORK CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate DISH NETWORK CORP (DISH) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: DISH Ratings Report
TheStreet Ratings team rates AT&T INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate AT&T INC (T) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, largely solid financial position with reasonable debt levels by most measures, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: T Ratings Report
TheStreet Ratings team rates T-MOBILE US INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate T-MOBILE US INC (TMUS) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and generally higher debt management risk."
You can view the full analysis from the report here: TMUS Ratings Report