Investors in telecom stocks have been afraid, even petrified, by SpaceX and the potential disruption it will bring to the wireless industry. Despite the worries, AT&T, T-Mobile US, and Verizon Communications won't only survive; they will thrive.
Though known primarily for launching rockets into space, the Elon Musk-led company has ambitions to turn Starlink, its space-based broadband product, into the dominant communications company of the future. The market is taking the threat seriously. Shares of wireless providers have been shaky ever since SpaceX President Gwynne Shotwell said the opportunity for "Starlink Mobile" was "huge," in a CNBC interview on June 12.
The pressure continued with SpaceX's first earnings call on Tuesday. Shares of AT&T, Verizon, and T-Mobile all fell 2% to 2.5% after the company said it planned to launch a mobile offering in 2027.
Revenue of the three wireless carriers in the U.S. is $600 billion a year, Shotwell said on SpaceX's earnings call, "and I anticipate us to be able to acquire quite a few of their customers because I think our service will be better." (Editor's note: Combined revenue is actually closer to $360 billion.)
When it will be better, and how SpaceX Mobile will go to market, remain open questions. But the declines suggest the market believes cable and wireless companies will be fighting a long battle against disruption -- and losing.
It's time to take a deep breath. Disruption is coming, but not as soon as -- or in the way -- investors expect. Starlink will grow and adapt, but the communications network architecture of the future will include the ground-based assets and the wireless spectrum assets amassed over the years by the traditional providers. Inevitably, the selloff reflects fears of the future, rather than the near-term impact on Verizon, AT&T, and T-Mobile.
"The perceived risk of Starlink Mobile disrupting the U.S. wireless industry is greater than the actual risk in the next one to two years," says Morgan Stanley analyst Sean Diffley.
The market has never seen anything like SpaceX before -- and neither have telecom companies. Right now, its Starlink business provides satellite-based internet service to 12 million subscribers and has profit margins north of 60%. Musk's ambitions are far bigger than internet service for planes or oceangoing ships. He plans to put 100,000 third-generation Starlink satellites into orbit, aided by the low costs of his fully reusable Starship, which is still in the test phase but is designed to put up to 150 metric tons into space with each launch at a tenth the per-kilogram cost of the current Falcon 9 rocket. Starlink V3 satellites have 10 times the capacity of current models.
With costs going down and the capabilities of SpaceX satellites increasing, the conclusion seems inevitable: SpaceX is Netflix and the wireless industry is Blockbuster Video.
SpaceX also arrives at an inopportune moment for the wireless titans. Next-gen 5G wireless was its own disruptive technology, enabling data transfer speeds that enabled streaming. With 5G, the wireless industry realized it could offer home internet, called "fixed wireless access," as part of a bundle with mobile phones. Cable companies then had to offer mobile service or risk losing their subscribers, who were already cutting the cord. They can route wireless calls over their wired networks and rent cellular capacity from traditional wireless companies when customers move out of Wi-Fi range.
The result has been a stalemate that slightly favors wireless companies. AT&T, for instance, is expected to grow sales and earnings over the next few years but at below-market rates -- a big reason it trades at 9.5 times expected earnings over the next 12 months, down from 13 times a year ago. Comcast will be lucky to keep sales and earnings flat, which is why it trades closer to seven times.
Wall Street has fed the fire. In early and almost universally positive research reports on SpaceX, it has consistently called the rocket and artificial-intelligence company a disruptive force. The average analyst price target for its stock is about $227, valuing SpaceX at about $3 trillion, or roughly five times the combined market value of AT&T, Verizon, and T-Mobile.
The Big Three wireless companies will also suffer from operating under their large debt loads. AT&T, Verizon, and T-Mobile have roughly $420 billion in net debt against $140 billion in expected 2026 earnings before interest, taxes, depreciation, and amortization, or Ebitda. "I would not for a second sleep easily if I had the investments that [wireless telecom providers] have, and the debt that they have, and Elon Musk working on a superweapon as it pertains to my business," says Drew Cupps of Polen Capital.
Yet not everyone on Wall Street is willing to buy into Starlink as the destroyer of all telecom. Part of the issue is cost. Daiwa Capital Markets analyst Jonathan Kees argues that the amount of investment needed to truly disrupt terrestrial players is misunderstood. He puts the cost of building out the Starlink constellation with V3 satellites at north of $100 billion, and that doesn't include SpaceX's AI ambitions. Starlink is "only a complement, not a substitute" for existing wireless infrastructure, says Kees.
Because it's a satellite system, Starlink will have a tough time serving densely packed urban areas. V3 satellites are impressive, but they cover an area hundreds of miles wide; a cell tower deals with an area of a few square miles. Even V3 satellites can't handle all the bandwidth required -- yet. For that reason, BofA Securities' Michael Funk also doesn't consider SpaceX a big threat. While some see low-earth-orbit wireless taking 15% to 35% of the U.S. telecom market, he thinks those estimates are too optimistic. "Existing direct-to-device satellite technology [is] underdeveloped and largely complementary to terrestrial mobile networks, " Funk says.
SpaceX might decide it can't go it alone, at least not yet. Instead, it might set up a mobile virtual network operator, or MVNO, agreement with one of the legacy carriers -- essentially renting network capacity at wholesale rates and selling it to consumers, the way EchoStar's Boost Mobile rents AT&T's network. Why would AT&T, Verizon, or T-Mobile roll the SpaceX Trojan horse into their corporate walls? They might not have a choice. Several analysts have recently written about the wireless industry's "prisoner's dilemma," noting that wireless operators might prefer to keep Musk on the outside, but the first to partner with him will generate value at the expense of the others.
SpaceX is "going to have to partner with one of the mobile network operators like a Verizon or T-Mobile," says RBC Capital Markets analyst Ken Herbert. "They're going to have to find ways to work with other companies."
T-Mobile is a favorite of BofA's Funk for its higher market share in the dense urban markets that Starlink will have the most trouble serving. The two companies already have a space-to-cell partnership. Verizon, as the traditional carrier boasting the best coverage, has its growth tied to fixed wireless access, which is the business SpaceX is stealing now. It has the most to lose, and therefore the most to gain from an MVNO relationship with SpaceX, says Wells Fargo's Steven Cahall.
If space and terrestrial networks need each other, the value of wireless companies' assets will grow, not decline, because the ability to move bits through space has become more valuable. EchoStar stock has tripled over the past year, largely due to the value of its spectrum holdings, which SpaceX and AT&T are buying.
All the traditional wireless carriers have spectrum assets, which, based on recent sales prices, are worth a combined $400 billion-plus. That's about 80% of their combined market value -- just about enough to cover their debt. Spectrum alone isn't enough to justify purchasing the wireless stocks, but it provides an interesting floor.
The wireless carriers aren't going to sell their spectrum. They have businesses to run, and those businesses are reasonably valued. AT&T stock trades for about 9.4 times expected earnings over the next 12 months, down from 11.2 times at the start of the year. T-Mobile stock trades for 13.9 times earnings, down from 17.6 times, while Verizon shares trade for 9.1 times earnings, a low multiple that is little changed over recent months. Simply moving back to pre-SpaceX valuations implies a 20% gain for AT&T and a 30% gain for T-Mobile. Those moves assign no probability to investors eventually viewing wireless operators as partners rather than adversaries.
From that angle, shares of AT&T and T-Mobile look less like survivors and more like something even more valuable -- they look like bargains.
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