Atat&T Heads to $38, No Sad Faces as Apple Ends Iphone's Mobile Monogamy

ATAT&T Heads To $38, No Sad Faces As Apple Ends iPhone's Mobile Monogamy

AT&T competes primarily with Verizonand Sprint in the mobile phone business. The company has had a great ride with Apple’s iPhone on its side. However, as the exclusivity nears a probable end, AT&T is looking towards newer ways to market itself and reduce its dependence on the iPhone.

Our price estimate for AT&T is $37.84, implying about 30% upside to market price. We estimate that 45% of this stock value is generated by the company’s mobile phones and plans. Here we examine the outlook for AT&T in the wake of an impending Verizon iPhone launch.

iPhone Price Cut

From Jan. 7, 2011 onwards, AT&T is cutting the price of its iPhone 3GS model from $99 to $49. [1] Part of this comes from its attempt to clear remaining inventory as consumers increasingly adopt the iPhone 4 (and iPhone 5, which might be released later this year). AT&T might also be trying to engineer one more push to lock in new contract commitments as the probable end of iPhone exclusivity nears.

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To enact this type of price reduction, AT&T must eat the cost difference, meaning higher phone subsidies for customers and lower gross margins for AT&T. While the margin impact from iPhone 3GS discounting is unlikely to be material (given that this model is no longer the prime driver of new unit sales), AT&T’s stock value could be pressured if this discounting strategy is ultimately expanded to newer models as a means of maintaining market share.

Android to the Rescue

AT&T’s smartphone strategy for 2011 is heavily influenced by the probable loss of iPhone exclusivity. Fittingly, the company recently announced during the 2011 Consumer Electronics Show that it will be emphasizing Android-based...