AT&T Stock Gets a Downgrade. Why ‘Free’ iPhones Are Partly to Blame.

AT&T stock has gained 21% this year. (Joe Raedle/Getty Images)

Key Points

• Barclays downgraded AT&T shares to Equal Weight from Overweight due to concerns about increased phone upgrades pressuring margins.
• AT&T’s stock decreased by 1.8% to $27.73 on Wednesday following the downgrade.
• New software with artificial intelligence features and hardware innovations are expected to incentivize phone upgrades, impacting telecom free cash flow.

AT&T stock fell on Wednesday after Barclays downgraded shares of the telecommunications company. The analyst is concerned that an increase in phone upgrades could pressure the company’s margins.

Kannan Venkateshwar changed his rating on shares of AT&T to Equal Weight from Overweight and reiterated his $30 price target on the stock on Wednesday.

Shares of AT&T were down 1.8% to $27.73 on Wednesday.

“The company, along with the rest of the industry, is likely to see elevated churn and upgrade rates which in turn will pressure margins,” Venkateshwar wrote in a research note.

People have been upgrading their phones less often than they have in the past as the devices become more durable and prices for new models increase. Plus, even though new releases have brought improvements to cameras and battery life, critics say changes that could drive more updates, such as improvements to phone hardware and software, have been lacking.

Now that appears to be changing. Companies are releasing new software with artificial-intelligence features in an attempt to incentivize upgrades. Alphabet’s Google Pixel phone and Apple’s latest lineup of iPhones are built with AI capabilities in mind.

On top of software changes, Apple is working on new hardware to get customers excited. The iPhone Air that launched in September is the thinnest iPhone yet, and the biggest change the company has made to the iPhone’s size and shape in years. Analysts also expect Apple to launch a foldable iPhone sometime next year.

These changes are positive for the tech companies, but they could put some pressure on AT&T and other telecom companies that spend a lot on promotions that give away new devices to customers who switch cellular networks.

“If operators continue with their present buyout promotions and if upgrade rates step up further due to new form factors, the pressure on operator free cash flow and margins could be material,” Barclays’ Venkateshwar wrote.

AT&T declined to comment on the downgrade from Barclays.

Shares of AT&T have risen 21% this year. The stock is now trading at 13 times earnings expected over the next 12 months, which is above its five-year average of $8.7 times forward earnings.

Verizon Communications currently trades at 9.1 times forward earnings, while T-Mobile US trades at 19.9 times.

Write to Angela Palumbo at angela.palumbo@dowjones.com