Is Apple Losing to AT&T and Verizon?

Apple (NASDAQ:AAPL) thumbed its nose at its U.S. wireless partners in the first quarter of the year to announce iPhone sales that were above expectations despite falling domestic numbers. But investors are beginning to pull behind Verizon (NYSE:VZ) and AT&T (NYSE:T) as the two carriers’ lowered iPhone sales land them unexpected short-term gains, according to CNN Money.

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Over the last month, Verizon and AT&T have been the second- and third-best performers among the 30 Dow Jones industrial average stocks, rising 8.2 percent and 7.8 percent respectively. Over the same time, Apple’s stock has fallen by almost 11 percent.

For both Verizon and AT&T, a decline in iPhone sales from January to March led to a growth in their service profit margins, largely because the carriers have to pay heavy subsidies to bring the cost of iPhone devices down for customers. Verizon’s margin rose to 46 percent from 42 percent in the fourth quarter, while AT&T went up to 42 percent from 38 percent.

“Improved margins from AT&T and Verizon, and more muted outlooks from tech and cable companies, has caused a substantial rotation into telecom,” Macquarie Research analyst Kevin Smithen said.

Meanwhile, Apple has said it is expecting fewer iPhones to sell from April and June.

“When you see AT&T doing well when they sell fewer iPhones, it raises questions about the subsidy issue,” BCG analyst Colin Gillis told CNN Money. “Competition is coming in hard and fast using the one lever they have: price. And though it’s a good deal to subsidize a smartphone for $400 and lock a customer in for two years, it’s an even better deal to do it for $200.”

Verizon has been pushing customers toward 4G Google (NASDAQ:GOOG) Android devices just to encourage this competition.

However, things can change back very quickly as Apple is reportedly planning to launch its next-generation iPhone later this year, and that will lead to a renewed surge in demand. “We expect iPain to reemerge with the next iPhone refresh cycle,” Nomura analyst Mike McCormack said.

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