The rollout of 5G is gaining traction in many parts of the world, prompting investors to look for opportunities in this space. Most seem to be focused on smart-device manufacturers that are likely to report higher sales in the future, as consumers purchase 5G-enabled devices.
The telecommunication services sector, however, stands to benefit from the increasing adoption of 5G technology as well. Verizon Communications Inc. (VZ) is one of the most overlooked telecommunication companies in the market, but the company seems well-positioned to deliver strong earnings in the next few years. (See Verizon stock charts on TipRanks)
Network Quality is a Differentiator
Verizon’s business strategy has always been to invest in its network infrastructure to offer high-quality wireless and fixed-line solutions to subscribers. In return, the company expects customers to remain loyal.
There is a strong demand in the market for network providers that offer a seamless broadband experience to subscribers. Verizon made several key decisions in this space during the 2010s (more on this below), and is now in a strong position to gain market share because of it.
Verizon reported adjusted earnings per share of $1.37 in Q2 2021, which is the highest-ever reported quarterly EPS in the history of the company. This success was driven by the addition of 92,000 Fios Internet broadband subscribers and 275,000 net wireless postpaid phone customer additions in the quarter.
Although many telecommunication companies are struggling to win and retain fixed broadband customers, Verizon is continuing to add new ones to Fios, primarily as a result of its superior network quality.
The New-Look Verizon is Efficient
The company has made many moves to improve the efficiency of its business model over the past decade. One of the most important decisions was to scale down its fixed broadband business to focus on regions in which the company enjoys competitive advantages.
After many years and multiple divestments later, Verizon now enjoys acceptable margins from its fixed-broadband business and is well on track to expand its footprint from the Northeastern United States to other areas of the country.
In the last five years, Verizon has also been focused on expanding its fiber business. This is now coming in handy, as customers are looking for high-speed broadband solutions to support video streaming, gaming, and other data-consuming activities. Verizon partnered with The Walt Disney Company (DIS) to offer unlimited-plan subscriptions with free access to Disney+, Hulu, and ESPN+ for up to one year.
This partnership has been helpful in attracting new customers, and Verizon is exploring the possibility of securing new partnerships to gain further market share.
Favorable Market Structure
The wireless subscription market in the United States is dominated by AT&T Inc. (T), Verizon, and T-Mobile U.S. Inc. (TMUS). With a market share of 29.1%, Verizon is the second-largest player behind AT&T, and these three companies control nearly 99% of the wireless market.
The industry therefore exhibits oligopolistic characteristics, and it does not make sense for one of these carriers to use a pricing strategy to compete with another, as it would only lead to an overall decline in profitability for the entire industry.
Verizon has historically reported the best return on equity among these three players, and this favorable market structure ensures the ability of the company to deliver high-quality earnings in the future as well, given the unlikelihood of new competition.
Wall Street’s Take
According to TipRanks, Verizon stock has a consensus rating of Moderate Buy, with five Buy ratings, five Hold ratings, and one Sell rating.
The average Verizon price target is $61.80 per share, which implies upside potential of 11.4% from the current market price. The share price, however, could easily reach the high-end estimate of $68 per share if the company continues to report strong earnings driven by better-than-expected new customer additions.
Takeaway
Verizon Communications, with its strong network coverage, is well-positioned to benefit from the rollout of 5G technology. In total contrast to tech giants, Verizon is valued at a forward price-to-earnings ratio of just 11.50, which has a lot to do with the subdued investor sentiment toward telecommunication companies in the United States. Verizon offers cheap exposure to the expected success of the 5G technology.
Disclosure: Dilantha De Silva did not own any shares mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
