While VZ shares have underperformed the S&P 500, the telecom giant often attracts income-oriented investors, thanks to its dividends. However, if 5G wireless services revive earnings and revenue growth, Verizon stock could have much greater appeal.
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Verizon Communications (VZ) has gained about 2% so far in 2023. Verizon shares are down 24% in 2022, while the S&P 500 is down more than 19%.
Verizon reported adjusted fourth-quarter earnings that met estimates but missed its 2023 earnings outlook. More aggressive wireless promotions, primarily smartphone subsidies, are expected to hit 2023 earnings.
Some analysts focused on higher estimates for free cash flow in 2023 and 2024 amid a projected drop in capital spending.
“(Verizon’s) underlying business is relatively resilient to recession/inflation, while multi-year FCF growth (driven by a significant reduction in capex in 2024) and sure dividend create defensive stock on aversion tape to risk,” the Cowen analyst said. Gregory Williams in a report.
The mobile phone giant is facing a fierce marketing battle amid the rollout of 5G networks.
On December 5, the company rocked its consumer wireless business. Verizon fired Manon Brouillette, who joined the company in June 2021 and was promoted to CEO of the consumer business in January 2022. CEO Hans Vestberg took over from Brouillette.
Verizon may be in a difficult position as wireless competition increases with AT&T (T) and T-Mobile USA (TMUS), analysts say. Instead of chasing subscriber market share, Verizon has focused on subscriber median monthly revenue.
VZ Stock: Market Share Losses
Telecom stocks had been seen as a defensive play amid concerns that a recession could hit the US economy. A component of the Dow, Verizon stock pays a 4.8% dividend.
A surplus in VZ shares involves midband radio spectrum it bought for 5G wireless services. Verizon shares spent $53 billion at a government auction, including incentive payments to satellite operators and compensation costs. The purchase of mid-band spectrum for 5G services will delay the VZ share buyback.
VZ shares in May 2021 sold a 90% stake in its media and advertising business to Apollo Global Management for $5 billion.
In a positive note, Verizon finally closed on the Mexico-based company’s $6.25 billion acquisition of Tracfone in November. Mobile America (AMX). Tracfone sells prepaid wireless services.
For Verizon stock, one problem is that 5G wireless competition is expected to intensify.
T-Mobile US’s acquisition of Sprint created a stronger rival. In addition, AT&T merged its WarnerMedia business with Discovery (DISC). As a result, a reduced AT&T is expected to have more money to invest in 5G wireless technology and fiber optic services.
Verizon Stock: Midband spectrum is key to 5G revenue growth
Now that Verizon has enough 5G midband spectrum, building out its network will be key. Verizon aims to reach 175 million people by the end of 2022 with mid-band spectrum-based 5G services that deliver faster data speeds.
In addition, Verizon plans to use the 5G midband spectrum to provide fixed broadband services to homes. Cable TV companies currently dominate residential broadband. The telecommunications company said its fixed broadband service will reach 30 million homes by the end of 2023.
Verizon expects commercial 5G services to gain momentum in 2022. In addition, it is investing in “mobile edge computing” sites that provide private commercial 5G services.
VZ Stock: Content Deals
New York-based Verizon has partnered with walt disney (DIS) on video streaming services. Disney and Verizon in August expanded their streaming partnership to include Hulu and ESPN+. Verizon has also partnered to Apple (AAPL) music services and sports leagues.
In December 2020, Verizon added Discovery (DISCA) as a video broadcast partner.
Thanks to low interest rates, Verizon shares have been on a roll since the global recession of 2008-2009. The telecom giant at one point jumped onto the IBD leaderboard. It is a curated list of leading stocks that stand out on technical and fundamental metrics.
But Verizon has much more exposure to the US wireless market than its telecommunications rival, AT&T. Verizon makes nearly 85% of adjusted profits from its wireless business.
The company has paid debt since it bought Vodafone Group‘s (VOD) 45% stake in a $130 billion wireless joint venture in early 2014.
Vestberg served as CEO at the network equipment maker ericsson (ERICY) before joining Verizon. Vestberg and chief strategy officer Rima Qureshi, also an Ericsson veteran, came to Verizon in 2017.
Fundamentals of VZ Stock in a Maturing Industry
Revenue growth remains an issue. Verizon’s long-term problem is that the US wireless market is saturated. Many consumers have delayed upgrading to new smartphones. Also, data-guzzling mobile video hasn’t turned out to be a big source of revenue.
For the December quarter, Verizon’s earnings were $1.19 per adjusted share, down 10% from a year earlier, excluding items. Revenue increased 3.5% to $35.3 billion.
A year earlier, Verizon earned $1.31 a share on revenue of $34.1 billion. Analysts had projected Verizon earnings of $1.19 a share on revenue of $35.1 billion for the quarter.
Verizon said it added 217,000 postpaid wireless subscribers, compared with analyst estimates for a gain of 201,000, including business and consumer subscribers. Verizon added 41,000 consumer subscribers in the fourth quarter. In the September quarter, Verizon lost 89,000 consumer lines.
For 2023, Verizon said it expects adjusted earnings per share of $4.70, at the midpoint of guidance. Verizon did not provide a total revenue outlook. It forecast wireless revenue growth of 3.5% versus estimates of 2.5%.
VZ stock analysts surveyed by FactSet had estimated 2023 earnings at $4.96 per share on revenue growth of 1.2%.
Verizon forecast adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in a range of $47 billion to $48.5 billion, without estimates. Analysts had forecast growth of 1.5% to $48.7 billion.
Verizon Stock: 5G wireless to the rescue?
Verizon’s 5G mobile network uses high-frequency, low-band radio waves. Its lower-band 5G services are widely available, but don’t offer much improvement in data speeds compared to older 4G networks.
Verizon’s 5G “Ultrawideband” or UWB mobile services use high-frequency millimeter wave spectrum.
Verizon has partnered with Amazon Web Services, the cloud computing arm of amazon.com (AMZN) to develop 5G applications for web-connected industrial devices. another partner is IBM (IBM).
Experts expect 5G wireless technology to play a role in automating manufacturing, cloud gaming, autonomous vehicles, drones, and remote healthcare services.
VZ Stock Analysis: Is It a Buy Right Now?
VZ stock has a Relative Strength Rating of 23 out of the best 99 possible, according to the IBD Stock Checkup. The best stocks tend to have an RS rating of 80 or better.
Verizon shares also have an IBD composite rating of 32 out of 99 best possible. The IBD Composite Score combines five separate proprietary scores into one easy-to-use score. The best growth stocks have a composite rating of 90 or better.
Meanwhile, Verizon shares have a D-plus accumulation/distribution rating. That rating looks at the price and volume changes in a stock over the last 13 weeks of trading. The rating, on a scale from A+ to E, measures the institutional buying and selling of a stock. A+ means strong institutional purchases; E stands for strong sale. Think of grade C as neutral.
Verizon shares are still trading below their 200-day moving average.
As of February 20, VZ shares do not have a valid entry point. You need to forge a new foundation.
Investors could take a look at other 5G stocks, such as chipmakers or network equipment providers.
Meanwhile, emerging 5G wireless applications could take years to generate significant revenue. Instead of buying Verizon stock, income-oriented investors might want to consider a large ETF like 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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