SpaceX’s Spectrum Purchase Exposes Risks for Big Telecom Stocks

(Bloomberg) -- Telecom stocks have long been considered a relatively safe bet for investors, offering predictable growth, limited downside and healthy dividends. But a combination of competition from SpaceX and rising Treasury yields is threatening to upend that equation.

Space Exploration Technologies Corp. announced last week that it's buying a swath of spectrum that will enable it to beam cellular service from its Starlink satellites, potentially setting up Elon Musk's aerospace technology company to become a major mobile carrier as well. Verizon Communications Inc., AT&T Inc., and T-Mobile US Inc. all suffered double-digit percentage declines on Friday after the news hit.

"Competitive risk is presenting itself in a way it hasn't in the past," said John Conca, a telecom analyst at Third Bridge Group. "The market perception is that this is just the first shoe dropping."

The telecommunications players were already under pressure from soaring interest rates. The yield on 10-year Treasuries crossed 5% on Sept. 15, and since then shares of Verizon and AT&T are down 14% while T-Mobile's have lost 13%. The companies are sensitive to bond yields because part of their appeal is based on their reliable dividend payouts.

"Some people buy them for their (dividend) yields on the idea that it comes with a growth kicker," said Michael Cuggino, president and portfolio manager at Permanent Portfolio Family of Funds. "But they're not growing very much, and there are risks to that growth down the road with this SpaceX question. At the same time, the yields don't look nearly as attractive as they might otherwise, because you can get a similar yield from risk-free Treasuries."

T-Mobile shares are down 22% this year, while AT&T has lost 7.2%. Verizon is up 9.1% but still trails the S&P 500 Index's 13% gain. SpaceX went public in June and the stock has jumped 13% from its IPO price, though it's 25% below the peak it hit within days of the IPO.

Of course, the threat from SpaceX is pretty far down the road considering it will need a lot of costly terrestrial infrastructure to effectively compete, especially in densely-populated markets, according to Conca. However, this is compounding pre-existing concerns about the pace of growth in the industry.