Verizon Communications Inc. (VZ), Sprint Nextel Corporation (S): Are The Short Sellers Right About These 2 Stocks?

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In any industry, the only way to avoid price wars is to offer a superior product or service.

Customers will pay full price only if they think your offering is top-notch. And you’ll find no clearer example to that approach than Verizon Wireless, a subsidiary of Verizon Communications Inc. (NYSE:VZ). In most consumer surveys, Verizon repeatedly comes out on top in terms of customer satisfaction, even as its service is often the most expensive choice.

On the flip side, Verizon Communications Inc. (NYSE:VZ)’s key rivals — Sprint Nextel Corporation (NYSE:S) and AT&T Inc. (NYSE:T) — are learning what happens when you skimp on network investments. Both of these firms garner inferior consumer ratings, and despite billions being spent to upgrade their networks now, they still can’t close the perception gap against Verizon.

Verizon Communications Inc. (NYSE:VZ)Yet even as Sprint Nextel Corporation (NYSE:S) and AT&T Inc. (NYSE:T) evaluate how to catch up to Verizon Communications Inc. (NYSE:VZ), behind-the-scenes discussions may upend the entire wireless service industry. That may help explain why short sellers are now targeting both Sprint and AT&T in a big way.

Rising Short Interest (in millions)

Delivering wireless services is quite lucrative. Though it takes billions to build out a national network, the profit margins on those monthly bills are quite robust (once network amortization costs are backed out). Verizon Communications Inc. (NYSE:VZ) Wireless’ margins on earnings before interest, taxes, depreciation and amortization (EBITDA), for example, now exceed 50%.

If a company could tap into that lucrative market without the need to spend billions on a new network, it would. In fact, that may be just what is happening. Google Inc (NASDAQ:GOOG), for example, is actively developing wireless networks in emerging markets, according to The Wall Street Journal.

If the company’s low-cost balloon-based approach succeeds in those markets, look for a similar effort to play out here in the U.S. in coming years. The Wall Street Journal also notes Google Inc (NASDAQ:GOOG)’s plans to roll out super-strong Wi-Fi in U.S. cities where it offers its fiber-based telecom and cable service, an effort that is likely being closely watched by the wireless incumbents.

Yet even as Google Inc (NASDAQ:GOOG)’s efforts are a long-term threat, a near-term threat is rapidly emerging. Globalstar, Inc. (PINK:GSAT) is pushing to offer its “Terrestrial Low-Powered Service” in the U.S., which would deliver voice and data from a series of low Earth orbit (LEO) satellites.

The Federal Communications Commission is reviewing Globalstar, Inc. (PINK:GSAT)’s application.

You can bet, Inc. (NASDAQ:AMZNis tracking the FCC’s moves. According to a recent report, Amazon would like to use Globalstar, Inc. (PINK:GSAT)’s network to offer its own wireless service. Amazon ostensibly wants users to connect to its site without the need of the major wireless carrier networks. But that’s just a Trojan horse. Google Inc (NASDAQ:GOOG) and Amazon have repeatedly talked about their interest in creating real competition for the wireless service providers.

The key takeaway: Both Google Inc (NASDAQ:GOOG) and, Inc. (NASDAQ:AMZN) are less interested in wireless service profits and more interested in creating deeper ties into their ecosystems. That means they are likely to undercut the incumbents on price — if they choose to enter these markets.

Does the rising level of short interest in Sprint Nextel Corporation (NYSE:S) and AT&T Inc. (NYSE:T) have anything to do with possible imminent announcements from Google Inc (NASDAQ:GOOG), Globalstar, Inc. (PINK:GSAT), the FCC,, Inc. (NASDAQ:AMZN), or others? That’s possible. But short sellers may also be looking at other issues.

For example, Sprint Nextel Corporation (NYSE:S)’s impressive multi-year rally has pushed the stock above fair value, according to Merrill Lynch, noting that valuations for companies are now quite rich “given the risks and challenges facing them as they try to grow market share and margins simultaneously to meet consensus expectations.”

Merrill Lynch also explains why short sellers are leaving Verizon Communications Inc. (NYSE:VZ) alone, even as they go after the company’s biggest rival, AT&T Inc. (NYSE:T). “We believe the absolute and comparatively larger increase in T shorts is likely driven by a perception that of the big two it is relatively more vulnerable to rising wireless competition.”

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