Telecom and Cable Stocks Drop On Verizon Earnings Miss.

Verizon $Verizon (VZ.US)$ reported earnings this morning and fell short of analyst estimates -- and that's caused $AT&T (T.US)$ and Comcast $Comcast (CMCSA.US)$ o fall with it. The market seems to be taking a sell-first, ask-questions-later approach to this earnings season so far.

Shares of Verizon traded as much as 7% lower on the day, Comcast dropped 3.2%, and AT&T was down 4.2%. The stocks were off 6.3%, 1.5%, and 3% respectively at 3:00 p.m. ET.

Verizon's upgrade trends
The headlines today show that Verizon's revenue missed estimates of $32.9 billion after a 0.6% increase in revenue to $32.8 million in the second quarter. But that was in large part because hardware sales, which lose money, were down $300 million to $5 billion.

Wireless service, which has about a 75% margin, was up 3.5% to $19.8 billion, and that's more important to the bottom line. That's why adjusted earnings of $1.15 per share hit estimates.

What was concerning for investors was the rate of upgrades, which was lower than expected and which management explicitly blamed for the revenue miss. If people are delaying upgrades at Verizon, they're likely doing the same at AT&T and at Comcast, which sells service that runs on Verizon's network.

It's a bit of a strange reaction, because higher hardware revenue would have meant lower profits. At the end of the day, that's what investors should be looking at.

Disruption in broadband?
AT&T's trends should be similar to Verizon's, but the news for Comcast may be worse. Verizon added another 378,000 fixed wireless subscribers, or broadband subscribers that use the company's 5G network. And management said there was plenty of capacity to add more customers as C-Band infrastructure was installed.

That could take customers away from the cable bundle and cable's last remaining cash-generating business, broadband. If wireless telecom companies can steal broadband customers and get them to bundle in streaming services with wireless services, it could be a huge disruption to their business.

Taking the long view
Despite the fact that revenue looked weak on the surface, I think there were positive signs for wireless companies growing wireless revenue, which is where the money is made. Equipment upgrades may be slowing, but that's not bad news for the business.

What will be key to watch long-term is what effect artificial intelligence (AI)-enabled devices have on the business in the near future. Does that drive more upgrades and have companies reduce subsidies to the point where upgrades can be relatively profitable? Is there an edge component to the AI buildout on the edge of the wireless network?

There are bullish trends for wireless companies that can keep their cash flow growing for years to come. The small revenue miss from Verizon and a slower upgrade cycle from customers aren't the bearish signals investors see them as today. That's why I think this is a long-term buying opportunity for Verizon and even AT&T, not a reason to sell today.