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Verizon shares fall after Citi downgrades the stock, predicting lower wireless pricing ahead

Key Points
  • Citi downgrades Verizon to neutral from buy and maintains its $62 price target.
  • "Verizon's consistently strong operating performance in the wireless category may not be enough to drive further multiple expansion at a time when investors are more likely to question the competitive environment and long-term risks to pricing and margins," Citi's Michael Rollins writes in a note to clients Monday.
  • Verizon shares fall in premarket trading.
A customer stands at a counter inside a Verizon Wireless retail store in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images

Shares of Verizon fell on Monday following a downgrade from Citi citing potential lower wireless pricing in the future.

Citi downgraded the stock to neutral from buy and maintained its $62 price target. Verizon shares fell more than 1% in premarket trading Monday and closed the day down 0.7%. 

"Verizon's consistently strong operating performance in the wireless category may not be enough to drive further multiple expansion at a time when investors are more likely to question the competitive environment and long-term risks to pricing and margins," Citi's Michael Rollins wrote in a note to clients.

The wireless carrier space is narrowing with a potential merger between T-Mobile and Sprint on the horizon. As new competitors come into the space without legacy pricing and with different margin goals, opportunities to expand margins are shrinking for Verizon, said Rollins.

A merger between T-Mobile and Sprint "creates a potentially disruptive fourth competitor [that] could be dilutive to long-term pricing and margins for the wireless industry," said Rollins.

Rollins said that Verizon, which is the second-largest U.S. wireless carrier, should consider and is well positioned to purchase DISH, which "holds a disruptive amount of spectrum that can be used to build a scale network."

Further, Verizon is at risk because the evolution of technology in the wireless carrier space is reducing costs, which is lowering the barrier to enter into the category, said Rollins.

Despite the downgrade, Citi said it is not concerned about Verizon's upcoming quarterly results.

Shares of Verizon are only up 2.9% since the start of the year, while T-Mobile, Sprint and AT&T are all up about 20% year to date.

— With reporting from CNBC's Michael Bloom