Starlink Mobile Service Could Be Coming to the U.S. Market Soon. Are Top Telecom Stocks in Trouble?

The big moneymaker for Space Exploration Technologies (NASDAQ: SPCX), which is also known as SpaceX, is its Starlink business. That's the one area of the company that generates strong growth, and that's actually profitable. Without it, SpaceX's losses and cash burn would be even worse.

The exciting potential for Starlink has resulted in many telecom stocks struggling this year, as investors worry about what it might mean for the broader sector. An increase in competition could weigh on margins and limit growth even further for companies such as AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) that don't generate much growth to begin with.

Starlink is reportedly looking at expanding its service in the U.S., which may only exacerbate those worries. Are the big players in telecom in trouble, and are their shares likely to fall even lower?

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Starlink to ramp up competition in the telecom sector?

According to a recent report, SpaceX may be planning to build a terrestrial mobile network in the U.S. for Starlink, which would enable it to more directly compete with telecom providers such as AT&T and Verizon. Its service currently fulfills a big need for customers in hard-to-reach remote areas, but by planning to invest heavily into developing its own mobile network, it could drastically ramp up its growth rate and potentially wreak havoc for rivals in the process.

As of the end of March, Starlink had 10.3 million subscribers, which was more than double what it reported a year earlier. The business has been growing fast, as at the end of 2023 its subscriber count was just 2.3 million. By reaching a broader section of the market, that could enable its growth rate to accelerate at an even faster rate.

The capital-intensive business comes with challenges

However, there's a reason investors aren't thrilled with telecom stocks, and why they typically don't make for great growth stocks: their costs and debt loads are often high. These capital-intensive businesses aren't ideal for fast-moving businesses and can make them less-than-ideal investments to own, particularly when interest rates are high and debt is costly. In the past five years, Verizon's stock has declined by more than 20% while AT&T has delivered flat returns. Meanwhile, the S&P 500 has risen by over 70%.

For SpaceX, it already has a capital-intensive business in artificial intelligence (AI), where it has been spending increasing amounts of money to grow that area of its operations. In its most recent quarter, capital expenditures on AI totaled $7.7 billion, up from $2.6 billion a year ago. Spending on connectivity, which includes its Starlink business, totaled $1.3 billion during the first three months of the year, pales in comparison. For SpaceX, it could be a balancing act for the business in how it allocates cash most effectively and efficiently.

Should telecom investors be worried?

Shares of AT&T and Verizon have been trading lower of late due to the perceived threat that Starlink poses to their businesses. But Starlink is still fairly small in size, and while it may be growing quickly, it is premature to suggest that it'll be a huge player in the telecom sector and that it'll end up taking significant market share from the current leaders. SpaceX needs to focus on space and AI -- the two areas of its business that are likely most compelling to growth investors and that drive its high valuation.

Ultimately, I don't think it's a huge risk right now or in the near future. While it may be worth AT&T and Verizon investors to keep an eye on Starlink, I don't think it's going to derail their respective businesses or make them worse investments. Competition has been a risk for these companies for years, yet they've continued to dominate, and that's likely to remain the case, as I don't think investing heavily in telecom will be a huge priority for SpaceX given the company's other pressing needs.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.