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

For a number of years, investors have accepted a secular decline in AT&T Inc. (NYSE:T)’s landline business for offsetting growth in its wireless unit. Yet that trade-off is increasingly being questioned.

In the second quarter, AT&T Inc. (NYSE:T)’s EBITDA margins fell 4.9% from a year ago as “profit margins (in the company’s wireless division) took a quarter-over-quarter hit for the first time since 2010,” note analysts at Goldman Sachs. The key culprit according to Goldman: “Wireless peers have ramped (and will continue increasing) competitive activity, driving AT&T towards potentially more promotional activity.” That’s a sure sign of a mature low-growth market.

AT&T Inc. (NYSE:T) and Sprint Nextel Corporation (NYSE:S) are starting to feel the heat of a more price-competitive market, even before the potential entrance of Google Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN) or others. With those kinds of headwinds in place, it’s no wonder short sellers are targeting these firms and anticipating a move down in their share prices.

Risks to Consider: As an upside risk, AT&T and Sprint could look to ease near-term investor concerns by pumping up cash flow through restrained capital spending, though that would put them at a further long-term disadvantage to Verizon.

Action to Take–> Neither AT&T nor Sprint is headed for deep trouble, nor are their stocks poised to plunge. But the headwinds are mounting, and they are running harder just to stay in place. Over the long haul, investors should brace for more intense price wars for wireless services, which is bound to erode cash flow. AT&T, in particular, with its still considerable exposure to a declining landline business, looks set for steady declines in revenues in coming years as the wireless end of the business maxes out.

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