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Is Verizon Stock A Buy? 5G Wireless Competition Vs. AT&T, T-Mobile To Intensify

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.




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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.

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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 reports second-quarter earnings on July 21.

It’s expected to trail T-Mobile and AT&T in signing up new postpaid wireless subscribers.

Verizon Stock: Earnings Due July 21

VZ stock on May 3 sold a 90% stake in its media and advertising business to Apollo Global Management for $5 billion. The deal is expected to close in the second half of 2021.

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 to 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.

On the plus side, Warren Buffet’s Berkshire Hathaway (BKH) on Feb. 16 disclosed a $8.6 billion stake in Verizon.

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.

For the March quarter, Verizon earnings came in at $1.31 an adjusted share, excluding items. Revenue rose 4% to $32.9 billion.

A year earlier, Verizon earned $1.26 a share on revenue of $31.6 billion. Analysts had projected Verizon earnings of $1.29 a share on revenue of $32.47 billion.

Wireless service revenue rose 2.4% to $16.7 billion. Verizon said it lost 178,000 postpaid wireless phone subscribers vs. analyst estimates for a loss of 198,000.

Analysts expect wireless subscriber growth to rebound in the June quarter.

“Verizon is cranking up the competitive intensity in wireless in Q2 with a new promotion on trade-in devices, which should enable it to dramatically improve its subscriber performance,” Wells Fargo analyst Eric Luebchow said in a report to clients. “On the other hand, Verizon will be incurring the financial drag of its C-band investments more meaningfully through the remainder of 2021, with earnings and free cash flow set to step-down as capex and interest carry all become more material headwinds.”

In the March quarter, business unit revenue rose 1.3% to $7.8 billion. Verizon Media revenues were $1.9 billion, up about 10.4%.

For 2021, Verizon expects full-year adjusted per-share earnings in a range of $5 to $5.15 per share. Verizon forecast overall revenue growth of at least 2%, including wireless service revenue growth of at least 3%.

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.

Verizon has partnered with Amazon Web Services, the cloud computing arm of Amazon.com (AMZN) to develop 5G apps for the web-connected industrial devices. Another partner is IBM (IBM).

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?

VZ stock holds a Relative Strength Rating of only 14 out of a best possible 99, according to the IBD Stock Checkup. The best stocks tend to have an RS rating of 80 or better.

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 June 23, 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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