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AT&T, Verizon Stock Rally: How TV Auction Could Impact Trading

Shares of AT&T ( T ) and Verizon Communications ( VZ ) have rallied in 2016, owing to falling interest rates and their relative safety amid the stock market tumult. One factor sure to impact trading for both companies the rest of the year is the government’s auction of airwaves now owned by local TV broadcasters, set to start this month. Shares of the high-dividend-paying AT&T and Verizon are up 13% and 11% so far in 2016, respectively. But higher-than-expected auction spending would hit free cash flow and possibly credit ratings. Many analysts continue to downplay potential spending by wireless phone companies and others, but Citigroup estimates bids could reach $43 billion, in the neighborhood of 2015’s “AWS-3” auction. A Bloomberg survey , meanwhile, estimates the auction will raise only $33 billion, much less than the $60 billion figure floated by some observers in mid-2015. The Federal Communications Commission plans to begin the “Broadcast Incentive Auction” on March 29. The auction, which could last five to six months, will free up an estimated 60 to 80 megahertz of prime, low-frequency radio spectrum for wireless services. Both AT&T and Verizon have talked down their interest in the TV broadcast airwaves, and both have alternatives for spectrum, as IBD reported. T-Mobile US ( TMUS ) has stated it could spend up to $10 billion, while cable TV firm Comcast ( CMCSA ) has filed to be a bidder. There’s fresh speculation Japan-based SoftBank ( SFTBY ), Sprint’s majority owner, could bid, though Sprint ( S ) itself has bowed out. Alphabet ’s ( GOOGL ) Google also recently ruled itself out. Analyst estimates proved far too low for the AWS-3 auction, which ended in January 2015. Most analysts pegged AWS-3 auction spending in the mid-teens of billions of dollars, with the highest estimates around $20 billion. The auction, however, raised more than $41 billion — minus $3 billion in airwaves Dish Network ( DISH ) later surrendered. During that auction, wild rumors about Verizon’s purported spending pressured its stock at points, while AT&T eventually emerged as the top AWS-3 bidder. In the TV broadcast auction, JP Morgan estimates that bidders could spend anywhere from $25 billion to $35 billion. Cowen & Co. estimates AT&T, Verizon and T-Mobile will spend $27.5 billion combined. Comcast and private equity firms loom as wild cards. Several analysts have estimated Comcast’s spending at $5 billion-$6 billion. For the complex, two-part auction to succeed, bidding prices have to reach levels high enough that TV broadcasters follow through and sell the spectrum. If the auction doesn’t proceed as planned, it would be a blow for spectrum-needy T-Mobile, analysts say. Low-frequency airwaves travel over long distances and through walls, improving in-building services. AT&T and Verizon own more than 70% of low-frequency airwaves in the top 100 U.S. markets. FCC Chairman Tom Wheeler, whose legacy will be tied in part to whether the auction succeeds, has downplayed pre-auction comments by AT&T and Verizon, saying it’s normal for bidders to lower expectations.

Groupon Could Get More Users From Facebook In New Social Media Push

Groupon ‘s ( GRPN ) pledge to trim down and over-deliver as it transforms its operations drew praise Tuesday from investment bank William Blair. Groupon interim CFO Brian Kayman and investor relations chief Tom Grant said in meetings with William Blair last week that the company “had a tendency to ‘get ahead of its skis’ in terms of priorities and financial targets,” wrote analyst Ralph Schackart. That “overly-broad approach … led to some mis-execution,” Schackart said. “Going forward, the company is focused on executing against a narrower set of priorities to regain investor confidence, and it is attempting to set less ambitious guidance targets.” In a restructuring expected to be completed by September, Groupon is shutting down in unprofitable countries and scaling back low-margin goods. Groupon reported Q4 earnings that beat consensus, Schackart said, and now Groupon shares “are up 35% year-to-date — the highest of any company on our coverage list.” But it’s now up just 25%, with Groupon stock down 7% in midday trading in the stock market today , near 3.80. Schackart said “the company will need to show consistent execution against stated guidance for multiple quarters to regain increased investor confidence.” William Blair maintained a market perform rating on Groupon stock. Will Groupon’s Marketing Spend Produce Results? A key focus for investors is Groupon’s $150 million to $200 million incremental marketing investment for 2016, he said, especially since executives “noted that price, frequency and active customers are the three primary revenue drivers, and the incremental marketing spending will be focused on adding new customers.” On Tuesday, Groupon announced a series of website, mobile and tablet enhancements designed to make it easier for merchants to track and manage their Groupon campaigns. Groupon’s plans to use social media and search engine marketing in new ways drew praise. “For example, it might target people on Facebook ( FB ) who do not have the Groupon app with a mobile installation advertisement or bid on higher-level search words than in the past,” Schackart wrote. Other analysts have been more skeptical. “While Groupon has recently shown signs of progress in its transformation to an e-commerce marketplace and its core initiatives (including streamlining its international operations or customer acquisition), we believe there is still a long road ahead in strengthening the company’s positioning in the local ad and/or local e-commerce market,” wrote UBS analyst Eric Sheridan in an industry note on March 9. “Meanwhile, larger Internet companies, predominantly Alphabet ( GOOGL ) subsidiary Google and Facebook, are increasing their efforts to capture local ad dollars, while Amazon ‘s ( AMZN ) same-day delivery service reduces the benefit of a local marketplace.” Sheridan downgraded Groupon to sell from neutral and set a price target of 3.20. Sheridan sees several “key weaknesses” in Groupon’s competitive position, including marketing spend that will pressure near-term margins, rising competition, a shift to lower-margin business and slowing customer and engagement growth. Sheridan blamed those troubles on Groupon’s international retrenchment and its “lack of operating profit scale to drive additional investments in innovation that might counteract the platform strength of Google and Facebook.” Groupon’s changes come as others are also tweaking their strategies. Last week, Angie’s List ( ANGI ) got a revenue outlook boost from Pacific Crest Securities, which praised the online review site’s recent decision to drop its current membership model and replace it with free access to its business ratings and reviews as part of a tiered subscription plan. The addition of the free tier “should reignite user growth,” wrote Pacific Crest analyst Evan Wilson in a research report last week.

Pure Storage Remains Valiant In Fierce Battle With EMC, NetApp

Tectonic shifts to cloud computing and flash storage make the time ripe to build a new storage franchise, with Pure Storage ( PSTG ) seen as an industry disruptor. Pacific Crest Securities analyst Brent Bracelin, in a new research note, says that Pure Storage has been able to sustain solid growth and market share gains despite legacy vendors such as EMC ( EMC ) and NetApp ( NTAP ) putting Pure Storage in their cross hairs. Bracelin’s report came as Pure Storage introduced several new products on Monday that expand its portfolio of storage systems, including products that integrate more tightly with server gear from Cisco Systems ( CSCO ). Pure Storage provides the $24 billion enterprise storage market with technology using flash chips, similar to the chips that smartphones use. Flash-based storage arrays are much faster than disk-drive storage systems but come at a higher price, depending on how the technology is deployed. Flash is seen as the future of storage, with the transition well underway but still in the early stages. “We believe these new products, coupled with continued declines in flash pricing to less than $1 per GB, should give Pure Storage the ammunition to sustain share-gain momentum into 2016,” Bracelin wrote. EMC and NetApp lead in the disk-storage systems market and also have expanded into flash-chip storage systems. NetApp and EMC, which Dell is acquiring, are much larger than Pure Storage, but the smaller company is growing much faster. It has yet to turn a profit, however. Storage Ready For Revolutionary Changes Pure Storage revenue has zoomed from $6 million in 2013 to $440 million for its fiscal 2016 ended Jan. 31. But the company has posted big losses as it spends heavily on research and development and on marketing to grow market share. Pure Storage kept its string of triple-digit revenue growth alive on March 2, when it posted fourth-quarter earnings that beat Wall Street estimates, as did its Q1 outlook. Company CEO Scott Dietzen says that the data storage industry is on the cusp of a revolutionary change that Pure aims to lead. But a recent report from Summit Research said that while Pure Storage has cutting-edge data technology, it will face an uphill battle trying to dislodge EMC and NetApp. Bracelin has an overweight rating on Pure Storage stock and a price target of 24. Pure Storage stock was near 12.50, in midday trading on the stock market today — down 3% despite the bullish research note. Pure raised $425 million with its initial public offering on Oct. 7, pricing shares at 17. The stock peaked at 20.60 on Oct. 15 and hit a low of 11.05 on Feb 8. “While execution risks remain elevated as legacy vendors attempt to grab share by discounting storage pricing, a solid track record of execution since the October 2015 IPO increases our confidence that Pure Storage can sustain solid momentum and share gains,” Bracelin wrote. Image provided by Shutterstock .