Investors flee bad telecom smartphone bets

NEW YORK Thu Aug 4, 2011 2:10pm EDT

An employee holds out an iPhone for a customer at a Verizon store in Boston, Massachusetts February 10, 2011. REUTERS/Brian Snyder

An employee holds out an iPhone for a customer at a Verizon store in Boston, Massachusetts February 10, 2011.

Credit: Reuters/Brian Snyder

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NEW YORK (Reuters) - Smartphones may have good looks and a lot of whiz-bang features, but this week they just have a bad reputation.

In fact they are the main reason for the current investor exodus from the U.S. wireless sector. Shareholders in small operators MetroPCS Communications Inc and Leap Wireless International Inc have simply lost faith in the promise that smartphones would boost growth, analysts say.

While these devices may make consumers happy, investors instead see only increasing costs for carriers which subsidized the devices to help tie customers in for longer terms.

Even U.S. market leader Verizon Wireless, a joint venture of Verizon Communications Inc and Vodafone Group Plc, gave investors the jitters when it showed weak smartphone growth and customer spending July 22.

Shares in No. 3 U.S. mobile service Sprint Nextel Corp are down 24 percent since it reported subscriber losses and dramatic cost increases.

"People are rethinking what smartphones mean for telecoms, How much growth it can provide and the impact on its margins," said BTIG analyst Walter Piecyk.

On August 2, MetroPCS posted weaker than expected customer growth even as costs rose faster than Wall Street had expected. On top of this, executives told analysts on a conference call that customers with costly smartphones did not appear to have any more loyalty to the service that those with cheaper phones.

MetroPCS fell 37 percent on the day of its report and was down 11 percent to $9.14 in Thursday afternoon New York Stock Exchange trading; shares touched a low of $8.70 earlier in the session.

Leap dropped 21 percent in sympathy with MetroPCS on August 2.

Leap told analysts on a conference call following its results after the market close on August 3 that it was actually seeing a benefit from smartphones in the form of lower customer defections, compared with other customers. Investors, unconvinced by the upbeat tone, slammed Leap's stock down another 30 percent on Thursday.

To be sure, Leap and MetroPCS are more open to economic swings as their customers are people on tighter budgets who are particularly vulnerable in a weak economy.

Another rival, Clearwire Corp, was also down over 24 percent on Thursday afternoon as investors worried whether it would be able to raise the new funding it said it needs, even though it promised an operating profit sooner than expected.

In general there is "less visibility" into the future for smaller companies, Pacific Crest analyst Steve Clement said.

But before the second-quarter results, investors had hoped they could hang their hat on smartphones for at least some of those wireless operators.

"There were obviously significant expectations for what smartphones would do for these companies," said Clement. "In the quarter, that didn't play out."

Analysts are not disputing the rapidly expanding consumer demand for smartphones but are questioning whether wireless service providers are the best place to invest in the trend.

BTIG's Piecyk suggested that smartphone makers themselves could be a better place to put those bets. The most high-profile of these is iPhone maker Apple Inc.

"It's clearly more of a minefield to do it in the operator space today," he said. "The easier way to play all of this is that if you buy Apple, you're buying the arms dealer."

Verizon Communications, the majority owner of Verizon Wireless, saw its shares fall 2.3 percent to $35.16 on the New York Stock Exchange. All told the stock is down more than 6 percent from its July 21 close before its quarterly report.

AT&T Inc shares were down 1.5 percent at $29.06, also on the NYSE. Verizon Wireless and AT&T market the iPhone.

(Additional reporting by Himank Sharma; editing by Gerald E. McCormick)

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