BT Group PLC (LSE:BT.A) shares were hit by a downgrade from Berenberg on Tuesday, sparked by concerns about the pressure on the telecoms group's business-facing divisions.
The rating on the stock was cut from 'buy' to 'hold', with the share price target trimmed to 190p from 220p.
Analysts said recent first-quarter results from the FTSE 100 group raised a "multitude of questions" about the investment case, including whether BT's average revenue per user growth will slow in coming quarters in line with rivals as contracts come to an end, and whether capital expenditure guidance is realistic given the high figure in the quarter.
What's more, infrastructure wing Openreach reported a decline in its broadband base, prompting analyst Carl Murdock-Smith to wonder: "is this the first evidence of alternative networks starting to impact? Will Virgin Media O2 have success in entering the wholesale market, or acquire TalkTalk, putting Openreach’s revenues at long-term risk?"
The pressures on BT's business-facing units had perhaps previously been underestimated, the analyst acknowledged, pondering if the performance has "bottomed or could there be further downside?"
The spin-off of BT Sport into a joint venture with Warner Bros Discovery Inc (NASDAQ:WBD), which completed on 1 September, "should prove broadly EBITDA neutral", while the 18% stake taken by Altice owner Patrick Drahi, which was recently waved through by Downing Street, "creates optionality", the analyst said.
"While his motivations remain unclear, this creates the possibility of newsflow (or at least speculation) that could cause the share price to increase."
By the time the group resolves all these issues, "we will then be approaching the general election, at which point the pricing and Openreach debates will increasingly take over".
At the bottom line, BT shares look "cheap on earnings", Murdock-Smith said, with the shares available for eight times forecast earnings per share, this metric can "smooth out" the sort of big investment the telecoms group needs to make.
On a valuation based on cash flow, the shares look "expensive" at 16 times operational free cash flow.