What’s the iPhone’s Encore?

01/20/2009 1:00 pm EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer's Investment Research says wireless provider AT&T will face big questions once investors learn when its exclusive iPhone pact with Apple ends.

A recent Fortune article on telecommunications giant AT&T (NYSE: T) asks an important question: "What will AT&T do after the iPhone?" ("Life after iPhone," January 7th.) The device has quickly become another of Apple's (Nasdaq: AAPL) cultural icons, and has helped AT&T extend its subscribership lead over number two Verizon Communications (NYSE: VZ), with T sporting about 75 million wireless users to VZ's 71 million.

But as the article notes, "the iPhone isn't forever." Neither T nor AAPL will discuss when their exclusivity deal ends, but analysts estimate that AT&T may have the iPhone's American consumers in a lock for only a few more years. But the iPhone has already left its mark on the company, as CEO Randall Stephenson and other executives are pushing the idea that wireless phones with high data rates are indispensable.

[But] if the much ballyhooed iPhone has been such a boon for AT&T, why hasn't this materialized in the company's stock price? Since the device's launch on June 29, 2007, T shares have plunged more than 34%. Sure, some of this decline is due to the abysmal [market] and the global economic recession, but the equity even failed to take part in the great run higher in technology stocks at the end of 2007.

From June 29, 2007 through the end of the year, T added only six cents, while the Nasdaq Composite index rallied roughly 1.9%. What's more, since the release of the 3G iPhone on July 11, 2008, T shares are off more than 18%.

T continues to struggle with overhead resistance at its ten- and 20-week moving averages—trend lines [above which] the stock has finished only once on a weekly basis since late May 2008. What's more, the shares have also proven impotent against psychological resistance at the round-number $30 level—a region that has held T in check since late September 2008. (It closed above $25 Friday—Editor.)

Meanwhile, Wall Street hasn't given up on T despite its poor technical performance, and this may be a danger. Specifically, Zacks reports that 11 of the 19 analysts following the shares still rate them a Buy or better. What's more, the stock's 50-day call/put ratio on the International Securities Exchange and the Chicago Board Options Exchange reveals that calls bought to open have easily outnumbered puts bought to open during this time frame.

The problem with this is that it leaves the door wide open for analyst downgrades and a general deterioration of optimism on the shares. Should T and AAPL ever disclose the termination date of their exclusivity agreement, it could spark a sharp unwinding of these bullish bets. So, while it is important to wonder what AT&T will do in a post-iPhone world, it could be even more important to ask, "What will AT&T investors do after the iPhone?"

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