Investment banks have downgraded Telstra and a suite of other ASX-listed telecommunications companies over fears that Elon Musk’s SpaceX will lure customers away from the highly concentrated industry.
Analysts from Morgan Stanley and Jarden told clients on Wednesday that they had cut their projections for the telco giant’s share price over fears its earnings were under threat, including from SpaceX’s popular satellite internet service Starlink.
The downgrades came hot on the heels of a nationwide outage across Telstra’s network that disrupted emergency services and closed train lines on Wednesday. But the mobile blackout didn’t even rate a mention in the bearish notes.
“SpaceX will be a genuine disrupter in this market,” Morgan Stanley equity analysts Andrew McLeod and Angela Sutcliffe told clients, adding that the Australian market had not yet woken to the threat as it urged investors to stop treating SpaceX as a “distant global business”.
The duo slashed its share price targets by as much as 10 per cent for Telstra, Vodafone operator TPG Telecom, Aussie Broadband and Spark New Zealand.
Telstra shares fell 3 per cent on Wednesday to $4.92, as news of the outage and broker downgrades rippled through the market.
Morgan Stanley pointed to the sweeping business ambitions for Starlink outlined in the prospectus from SpaceX’s blockbuster initial public offering last month, and added Australia was an “attractive market” for it to expand.
Starlink’s growing coverage
Regulatory data showed that Starlink had 552,000 Australian subscribers at the end of last year, equal to about 5 per cent of its global subscriber base, the banks said. That’s despite Australians making up just 0.33 per cent of the global population.
Recent history also suggests that ASX-listed telcos don’t perform well when new entrants break into the highly concentrated market. The bank noted TPG’s 2017 expansion of its mobile network forced a de-rate in Telstra’s shares from an 18-times multiple to just 10-times over four years. TPG then went on to merge with Vodafone.
Jarden’s Liam Robertson and Charles Strong have also raised the alarm and downgraded Telstra to “underweight” rating from “neutral” on Wednesday, meaning that investors should hold a smaller position in the stock than its weighting in an index.
The analysts said Telstra’s big competitive advantage from its expansive mobile coverage network was being eroded by the rise of satellite direct-to-device connectivity, the technology Starlink uses to provide its coverage to standard mobile phones.
Government plans to make all three major mobile carriers – Telstra, Optus, and TPG – beef up their coverage across the country, in part by using satellite connectivity, is also expected to eat away at Telstra as the other carriers are forced to catch up.
Threat ‘overestimated’
Jarden warned the impact could shrink Telstra’s earnings before interest, taxes, depreciation and amortisation by as much as $1.1 billion.
“We frame this as a re-rating risk rather than a near-term earnings downgrade risk,” Robertson and Strong write in the report.
They added that while they don’t expect Starlink and similar firms to directly replace Telstra, the advent of satellite technology would “increase the required return [from Telstra] acceptable for the market”.
SpaceX – which, in addition to Starlink, also runs rocket and artificial intelligence businesses – became the largest IPO in history when it listed last month. It raised $US75 billion ($108 billion) from a motley crew of investors that included billionaire Gina Rinehart and thousands of Australian retail shareholders. Shares in the company surged above $US200 in the early days of trading, but have fallen about 25 per cent since.
Despite the interest from Australian investors, analysts focused on local telcos said Starlink’s threat to the industry was overestimated.
“It’s not impossible – [in terms of] the technical challenges – but it’s not imminent,” said ClearBridge Investments senior research analyst Patrick Potts of Starlink’s ability to disrupt the local telcos.
“As we’ve seen today, Telstra’s mobile network is ubiquitous, it’s fully embedded into our day-to-day lives. It feels like we’ve had a hand cut off when network goes down,” he said. “This is an operator that is very good by world standards.”
Aside from the dominance of the established players, satellite technology also face logistical hurdles, including the fact that it works best in outdoor areas well away from where most of the telcos’ customer bases live.
“Most of Telstra’s value sits in metropolitan mobile and a recurring, government linked income stream tied to the NBN – satellite reaches neither,” said William Dougall, an investment specialist at Pengana Capital Group, which holds SpaceX and Telstra across two of its funds.
He also said that there was not a “straight contest” between Starlink and incumbents. Both Telstra and Optus have deals with the former to provide their satellite technology to customers, while TPG has partnered with rival Lynk Global.
Source: https://www.afr.com/markets/equity-markets/investments-banks-are-downgrading-telstra-and-not-because-of-the-outage-20260708-p60dio