When Verizon Communications reports second quarter earnings on Monday, management's outlook on an artificial intelligence-driven upgrade cycle for iPhone maker Apple will be key. Verizon stock has gained 11% in 2024 while Apple stock has advanced nearly 19%.
While an AI-driven iPhone upgrade cycle would be good news for Apple stock, it would be a negative development for Verizon, AT&T and T-Mobile US, Craig Moffett, analyst at MoffettNathanson, said in a report on Thursday.
Moffett says the wireless firms would face higher customer turnover. Also, because they subsidize the cost of iPhones in wireless promotions, the wireless firms would have higher equipment expenses, reducing free cash flow.
Verizon will host its earnings call with analysts Monday morning.
AT&T reports Q2 earnings on Wednesday. T-Mobil reports Q2 results on July 31. Q2 earnings for Apple stock are due Aug. 1.
Apple Stock Booms After WWDC
At its Worldwide Developers Conference, or WWDC, Apple said it will integrate OpenAI's ChatGPT into the Siri voice assistant and iOS 18. The "Apple Intelligence" features could spur a major iPhone 16 upgrade cycle in late 2024. New AI features will only be available on the iPhone 15 Pro/Pro Max and upcoming iPhone 16 models.
"In the roughly five weeks since unveiling its AI strategy on June 10, Apple's market cap has swelled by a mind-boggling $500 billion," Moffett said. "The five-week increase alone is more than the entire market cap of all three of the Big Three (wireless firms) combined. It is stating the obvious, then, to say that the market believes that Apple will succeed in driving an upgrade cycle. And yet, over the same period, telecom stocks have also moved higher. Telecom investors, it would seem, are betting against an upgrade cycle. Both can't be correct."
For his part, Moffett expects a modest iPhone upgrade cycle.
"We have revised our models — albeit relatively modestly, at this point — to reflect these expected market shifts," he added. "Investors should beware, however, that a larger (faster) AI-driven upgrade cycle is certainly possible. This poses a very significant risk for telecom investors."
At Barclays, analyst Kannan Venkateshwar holds a similar view.
"Post the recent Apple developers conference, there has been a growing debate among investors about a potential ramp in the upgrade cycle driven by AI phones which, if borne out, could be a drag on margins and free cash flow for telecom companies," Venkateshwar said in a July 8 report. "There is also some concern that higher upgrade rates may prompt more switching activity in the industry as consumers seek deals, which in turn may force operators to be more promotional to capture share of gross adds. We are not convinced that (AI) software features alone, at least in the present iteration, will change this upgrade trendline significantly without accompanying hardware form factor changes."
If Verizon management also predicts a modest iPhone upgrade cycle, that could move Apple stock lower on Monday.
What's good for Apple stock isn't good for the telecom stocks, Moffett noted.
"For 10 years, the wireless carriers have enjoyed an enormous tailwind," he added. "Falling iPhone upgrade rates have led to lower churn, higher margins, higher EBITDA, and higher free cash flow. Apple is betting that AI can reverse that decline."
Verizon Stock: Q2 EPS Seen Falling 5%
In Q2, analysts estimate Verizon EPS of $1.15, down 5%, with revenue rising 1% to $33.04 billion. In 2024, analysts have been looking for signs of a rebound in Verizon's consumer wireless business after subscriber losses last year.
However, some analysts remain cautious on the quality of postpaid subscriber additions. That's because a new Verizon promotion allows customers to add a second phone number on the same phone for a small monthly fee. The second phone number counts as a new subscriber using Verizon's accounting.
Meanwhile, AT&T stock has gained 14% in 2024. Further, T-Mobile stock has advanced 13%.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
