While VZ stock has consistently underperformed the S&P 500, Verizon stock often attracts income-oriented investors owing to its dividend. If 5G wireless services reignite earnings and revenue growth, however, Verizon stock might have much greater appeal.
VZ stock has retreated 6% in 2021.
Problem is, 5G wireless competition is expected to intensify. T-Mobile US‘s (TMUS) acquisition of Sprint created a stronger rival to Verizon Communications (VZ) and AT&T (T). T-Mobile owns the most radio spectrum for 5G wireless services.
In addition, AT&T recently agreed to merge its WarnerMedia business with Discovery (DISCA). As a result, a slimmed-down AT&T is expected to have more money to invest in 5G wireless technology and fiber-optic services.
Verizon in early June launched a new 5G promotion, countering upgrade offers from AT&T and T-Mobile.
Verizon Stock: Mid-Band Spectrum Key To 5G Revenue Growth
“Verizon’s consumer business sprang back to life in the second quarter, with phone adds and service revenues coming in ahead of expectations,” said Wells Fargo analyst Eric Luebchow in a recent report. “We suspect VZ’s subscriber momentum will carry into the second half of 2021, although an expected acceleration of competitive intensity will likely compress margins and profitability.”
VZ stock on May 3 sold a 90% stake in its media and advertising business to Apollo Global Management for $5 billion.
In addition, Verizon stock emerged as the top bidder in a recent government auction of mid-band radio spectrum. Verizon spent $53 billion, including incentive payments to satellite operators and clearing costs.
“The acquisition of C-band spectrum essentially doubled Verizon’s mid- and low-band spectrum portfolio,” said Wells Fargo analyst Eric Luebchow in a report. “The priority for 2021 is getting the spectrum cleared by the satellite companies and putting it on towers as quickly as possible.”
At Credit Suisse, analyst Douglas Mitchelson said: “Key for Verizon stock is management’s ability to monetize its generational C-Band investment through selling ever more premium consumer unlimited service (at a higher price), more devices per household, and eventually fixed wireless and new 5G enterprise and consumer services.”
At its investor day March 10, Verizon called for revenue growth of 4% or more in 2024 as it scales up 5G wireless services. Verizon forecast revenue growth of 2% in 2021, in line with prior guidance. That will increase to 3% growth in 2022 and 2023, the company said.
Now that Verizon owns sufficient 5G mid-band spectrum, its network build-out will be key. Verizon aims to reach 175 million people by the end of 2022 with mid-band spectrum-based 5G services that provide faster data speeds.
VZ Stock: 5G Investment Phase
In addition, Verizon said 5G mobile services will result in more consumers upgrading to unlimited monthly data plans. Currently, 61% of consumer subscribers have unlimited data plans, up from 40% in 2018.
Also, Verizon told analysts it plans to use the 5G mid-band spectrum to deliver fixed broadband services to homes. Cable TV companies currently dominate in residential broadband. The telecom said its fixed broadband service will reach 30 million homes by the end of 2023.
Verizon expects 5G business services to gain momentum in 2022. It’s investing in “mobile-edge compute” sites that provide private 5G business services.
The telecom firm expects to spend $10 billion more on building 5G wireless network infrastructure over the next three years. That amounts to roughly $3.3 billion a year. It’s in addition to the $18 billion each year it already spends maintaining its entire network. Some of that already is earmarked for 5G.
“The overarching question is whether investors will place a higher multiple on Verizon stock in advance of clear proof points for potential revenue acceleration in future years, balanced against minimal (earnings) growth during this investment phase and capital returns limited to the dividend for the next 4 to 5 years,” Credit Suisse analyst Douglas Mitchelson said in a recent report to clients.
Verizon Stock: Tracfone Acquisition Under Review
In a big move, Verizon on Sept. 14 agreed to buy prepaid wireless service provider Tracfone from Mexico-based America Movil (AMX) for $6.25 billion in cash and stock. Federal regulators are still reviewing the proposed deal.
Verizon and telecom rival AT&T are viewed as defensive plays because of high dividends. A Dow component, Verizon stock pays a 4.6% dividend.
Verizon holds less debt than AT&T, which acquired media giant Time Warner and earlier satellite TV broadcaster DirecTV. While Verizon has avoided large acquisitions, its foray into the media business through the AOL and Yahoo acquisitions misfired. In 2018, it took a $4.6 billion write-down on its media business, called Oath.
New York-based Verizon has partnered with Walt Disney (DIS) in video streaming services. Disney and Verizon in August expanded their streaming partnership to include Hulu and ESPN+. Verizon has also partnered for Apple (AAPL) Music services and with sports leagues.
In December, Verizon added Discovery (DISCA) as a video streaming partner.
VZ Stock: Top Management New
Thanks to low interest rates, Verizon stock has posted some good runs since the global recession of 2008-2009. The telecom giant at one point jumped into the IBD Leaderboard. It’s a curated list of leading stocks that stand out on technical and fundamental metrics.
Verizon is the largest provider of wireless services in the U.S. It also sells wired services to consumers in the Northeast and business services globally.
Verizon is much more exposed to the U.S. wireless market than rival telecom AT&T. Verizon gets nearly 85% of adjusted earnings from its wireless business.
The company has paid down debt since it bought Vodafone Group‘s (VOD) 45% stake in a wireless joint venture for $130 billion in early 2014.
Further, its senior leadership is new. Chief Executive Hans Vestberg served as network gear maker Ericsson‘s (ERICY) CEO before joining Verizon. Vestberg and Chief Strategy Officer Rima Qureshi, also an Ericsson veteran, both joined Verizon in 2017.
Ronan Dunne, head of Verizon’s consumer business, previously was CEO at British wireless firm O2. He joined Verizon in 2016.
VZ Stock Fundamentals In A Maturing Industry
Revenue growth remains an issue. Verizon’s long-range problem is that the U.S. wireless market is saturated.
Many consumers have delayed upgrading to new smartphones. Plus, data-gobbling mobile video hasn’t panned out as a big moneymaker.
Verizon’s June-quarter adjusted earnings, revenue and new postpaid wireless phone subscriber additions came in above expectations.
In addition, Verizon raised its full-year earnings guidance.
Verizon second-quarter earnings were $1.37 per share on an adjusted basis, excluding items. Revenue climbed nearly 11% to $33.8.
Analysts had projected Verizon earnings of $1.30 a share on revenue of $32.68 billion. The company said wireless service revenue rose about 6% to $16.9 billion vs. analyst estimates of $16.8 billion.
Further, Verizon said it added 275,000 postpaid wireless phone subscribers vs. analyst estimates for a 165,000 gain. In the year earlier period, Verizon added 173,000 postpaid wireless phone customers.
Consumer unit revenue rose 11% to $23.5 billion. Business unit revenue climbed 3.7% to $13.2 billion.
“Our strong first half performance and the momentum in our business gives us the confidence to raise our total wireless service revenue growth guidance to between 3.5% and 4% growth, an update from prior guidance of at least 3%,” Chief Financial Officer Matt Ellis said in a written release. “We are also raising our adjusted EPS guidance to the range of $5.25 to $5.35, an update from prior guidance of $5 to $5.15.”
Verizon Stock: 5G Wireless To The Rescue?
Verizon’s 5G mobile network uses both lower-band and high frequency airwaves. Its lower-band 5G services are widely available but don’t offer much improvement in data speeds over older 4G networks.
Verizon’s 5G “Ultrawideband,” or UWB, mobile services use high frequency, mmWave spectrum. UWB services were available in parts of 60 cities, including sports stadiums, by the end of 2020. But coverage is spotty even in urban areas, analysts say.
Pundits expect 5G wireless to have a role in manufacturing automation, cloud gaming, autonomous vehicles, drones and remote health care services.
VZ Stock Analysis: Is It A Buy Right Now?
Verizon stock, meanwhile, has an Accumulation/Distribution Rating of E. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
The purchase of mid-band spectrum for 5G services will delay a VZ stock buyback for years. Meanwhile, emerging 5G wireless apps could take years to generate significant revenue.
As of Sept. 2, VZ stock trades well below an entry point of 62.05.
Investors could take a look at other 5G stocks, such as chip makers or network gear suppliers.
Rather than buy Verizon stock, income-oriented investors might consider a large ETF such as SPY, which tracks the S&P 500.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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