By Steven Russolillo 

Bigger isn't necessarily better in telecom these days.

A saturated wireless market has hindered giants Verizon Communications Inc. and AT&T Inc. even as competition from smaller rivals exerts a drag on subscriber and revenue growth. Meanwhile, efforts to diversify their businesses have yielded varying degrees of success. The carriers' earnings reports this week are unlikely to offer much encouragement.

Analysts forecast Verizon on Tuesday will report fourth-quarter earnings of 89 cents a share, matching the year-ago figure. But the carrier is expected to report a third consecutive drop in quarterly revenue after six years of growth. Verizon's shares have fallen in the trading session that followed six of its past eight earnings reports.

On Wednesday, AT&T is expected to report that fourth-quarter revenue slipped from a year ago.

Adding to the uncertainty for Verizon is its pending $4.8 billion acquisition of Yahoo Inc.'s web assets. The Wall Street Journal reported U.S. authorities are investigating whether Yahoo's two massive data breaches should have been reported sooner to investors. It is unclear how the deal will proceed and whether Verizon will try to renegotiate the terms or even walk away from the pact.

Along with its acquisition of AOL Inc. in 2015, the Yahoo pact may be instrumental in Verizon's quest to compete with Facebook Inc. and Alphabet Inc.'s Google in digital advertising. By focusing on short content geared toward mobile, Verizon is beefing up its ownership and distribution of online content and using that data to target advertising. Including the current price of the Yahoo deal, Verizon will have spent about $10 billion on its content strategy.

That pales in comparison to AT&T's diversification into the more traditional TV and studio markets. It reached a still-pending deal last year to buy Time Warner Inc. for $85 billion and in 2015 purchased DirecTV for nearly $50 billion.

But what Verizon and AT&T have in common is investors haven't been too enamored with their share prices of late. Even including their postelection bumps, both stock prices are still down from this past summer. Furthermore, they have vastly lagged behind the sharp gains from smaller rivals Sprint Corp. and T-Mobile US Inc., which have been adding subscribers.

Verizon's and AT&T's valuations don't scream buy either. At 13 and 14 times projected earnings, respectively, both multiples are roughly in line with their recent averages over the past several years.

In this earnings season, don't be surprised if the big wireless carriers keep investors on hold.

 

(END) Dow Jones Newswires

January 24, 2017 02:47 ET (07:47 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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