AT&T Inc. shares are falling Thursday after Morgan Stanley downgraded the stock, citing competitive concerns ahead.
The stock is off 2.2% in Thursday afternoon trading and was leading the SPDR Communication Services Select Sector exchange-traded fund lower.
Analyst Simon Flannery moved his rating on the shares to equal weight from overweight, writing that AT&T could face challenges in building out its 5G network. An ongoing C-band wireless-spectrum auction allows AT&T, Verizon Communications Inc. and perhaps Dish Network Corp. the opportunity to acquire spectrum that would allow them to build comparable 5G networks to what T-Mobile U.S. Inc. has after it acquired valuable spectrum through its merger with Sprint.
The problem for AT&T is that the company has a weaker balance sheet than Verizon, which could impact its ability to spend up at the auction. Whatâ€™s more, Flannery said that early bidding in the auction suggests it will be â€œmore expensive than expected.â€
That means AT&T can either â€œcompete aggressively and spend whatever it takes to build a strong position in all major markets in both A and BC blocksâ€ or â€œbe more selectiveâ€ and look to get less spectrum, with a focus on BC blocks. The first option could be pricey, and the second positions the company to fall behind Verizon and T-Mobile in the 5G race.
â€œIf AT&T does spend aggressively in the auction, we will be watching the ratings agencies to see how they respond,â€ Flannery wrote, noting that AT&T declined to raise its dividend in its latest update.
Among other sources of concern for Flannery is that the wireless industry could be getting more competitive given a mature industry in the U.S. and market share gains for cable companies. This could lead to more aggressive pricing.
In all, Flannery sees a â€œlack of positive near-term catalystsâ€ for AT&T, and he lowered his price target on the stock to $34 from $36.
AT&T shares have shed 24% so far this year as the S&P 500 has added 15%.