Shares of AT&T (T) are under pressure on Thursday after Morgan Stanley analyst Simon Flannery downgraded the stock to Equal Weight, citing rising 5G risks. The analyst expects a "robust" 5G smartphone upgrade cycle in 2021 to create risks for AT&T, with the switcher pool increasing as consumers look to buy new 5G iPhones from Apple (AAPL).

RISING 5G RISKS: Morgan Stanley analyst Simon Flannery downgraded AT&T to Equal Weight from Overweight with a price target of $34, down from $36. The analyst expects a "robust" 5G smartphone upgrade cycle in 2021 to create risks for AT&T given that as consumers look to buy new 5G iPhones from Apple, he would expect the switcher pool to increase. While AT&T does have nationwide coverage with low band 5G, it will not be able to match the speeds of T-Mobile's (TMUS) mid-band network for "a number of years," Flannery contended.

The analyst is also increasingly concerned that the C-Band spectrum auction will be more expensive than expected, which creates a strategic and financial risk for AT&T. Flannery believes that acquiring a large allocation of C-Band wireless spectrum will be key for AT&T and Verizon (VZ) to build a mid-band 5G network that is competitive with TMobile’s 2.5 GHz rollout. Lastly, he highlighted the lack of near-term catalysts after a dividend freeze and provision of early guidance on 2021 free cash flow.

WHAT'S NOTABLE: Last month, Wells Fargo analyst Eric Luebchow resumed coverage of AT&T with an Underweight rating and $25 price target. Luebchow argued that AT&T is in a difficult position as it struggles to balance investing in its core business segments while deleveraging and paying a sizable dividend. This balancing act is made more difficult by continued declines in legacy business segments and the COVID-19 impact on its WarnerMedia business, which will continue to be a headwind into 2021, Luebchow said. In wireless, the analyst believes AT&T is at risk of falling behind T-Mobile and Verizon in the 5G race and will have the most limited mid-band and ultra-high-band spectrum portfolio relative to its peers following the C-band auction.

PRICE ACTION: In morning trading, shares of AT&T have dropped about 2% to $29.71.