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Verizon: Solid Fundamentals, Meager Stock Performance
Stock Analysis & Ideas

Verizon: Solid Fundamentals, Meager Stock Performance

Cellular service companies such as Verizon (NYSE: VZ) have been receiving a great deal of attention as of late, especially due to the controversy regarding 5G and its effects.

While this debate is ongoing, one thing is still clear: most people have a cell phone that needs service. With few carriers available in an oligopolistic market, this is great news for Verizon.

How long can this growth last? Will the market ever become saturated, especially if new technologies such as 5G do not come to fruition? Verizon’s Q4 earnings report and full-year 2021 results imply there is indeed more room for growth and opportunities, but the stock performance may lead investors to believe the contrary.

Over the last year, VZ has been outperformed by the market, essentially staying put against the 9% gain of the S&P 500. Additionally, the stock is trading below both its 50- and 200-period moving averages – a bearish signal.

Despite this, based on strong fundamentals, Verizon chairman and CEO Hans Vestberg touted the company’s performance over the last year, and has a positive outlook toward the future, stating, “2021 was a transformational year for Verizon that will serve as a catalyst for us.” 

He continued, “We delivered on all of our goals in 2021 and made great progress on our five paths of growth.”

I’m neutral on Verizon.

Favorable Fundamentals and Financial Performance

A simple fundamental analysis suggests that Verizon’s business may be just as reliable as its services.

To begin, the company’s profit and operating margins are 16.51% and 24.29%, respectively. Similarly, return on assets is 5.32%, along with return on equity of 29.67%.

The company has also been able to maintain positive economic profit, or the difference between return on invested capital and weighted average cost of capital, which has been approximately 4% over the last several years. 

While this is not extraordinarily high, it outperforms competitors such as T-Mobile (TMUS) and AT&T (T), who currently generate 0% economic profit, indicating Verizon manages its capital more effectively than its competitors.

Considering Q4 2021, operating revenue declined 1.8% year-over-year to $34.1 billion, though total wireless service revenue increased 6.5% year-over-year to $17.8 billion. This translates into EPS of $1.11, the same as the previous year; however, adjusted EPS was $1.31 compared to $1.21 in Q4 2020, an 8.3% increase.

Net income was $4.7 billion, a mere 0.4% increase compared to the previous year, with adjusted EBITDA remaining relatively the same.

Full-year 2021 results were more positive, with operating revenues up 4.1% year-over-year to $133.6 billion and EPS of $5.32 compared to $4.30 in 2020. Subsequently, adjusted EPS also grew from $4.90 in 2020 to $5.39, a 10% increase. 

Although substantial growth was present in 2021, the same is not true over the last three years, with a three-year revenue growth rate of only 0.5%.

As far as valuation, Verizon’s P/E ratio is 10x, slightly higher than AT&T’s 8.4x but drastically below T-Mobile’s 50.6x.

Lastly, slightly offsetting the recent lack of returns on the stock, Verizon has an attractive dividend yield of 4.78% that has consistently increased over the last 15 years, though free cash flow actually declined to $19.3 billion in 2021 from $23.6 billion. A continuation of this trend could certainly threaten the possibility of dividends and stock buybacks.

A Favorable Market with Economic Moats

Operating within an oligopoly enables Verizon to possess several sustainable competitive advantages.

To begin, Verizon has developed economies of scale. Not only is this due to a large customer base, but Verizon has established a multitude of strategic partnerships with companies such as Apple (AAPL), Google (GOOG), and Amazon Web Services (AMZN), bundling products and services.

Verizon has also created a first-of-its-kind partnership with Meta (FB) regarding the Metaverse, which can be facilitated by Verizon’s capabilities. For instance, Verizon’s network requirements already support XR cloud rendering and low latency streaming.

Furthermore, the company recently completed acquisitions of Tracfone and BlueJeans, reaching more customers in the value-oriented cellular and cloud-based video conferencing markets, respectively.

The culmination of scale, partnerships, and acquisitions creates an additional and perhaps most prominent competitive advantage for Verizon: economies of networking. Essentially, economies of networking result in the value of a good or service being increased as the number of users also increases, which is certainly true of cellular services. 

Network economies generally grow at a faster pace than the costs establishing them, as stated by Metcalfe’s Law.

This grants Verizon a great deal of pricing power and enables it to occupy a large portion of the market, both of which are sustainable over the long term thanks to these restrictions to entry.

Wall Street’s Take

VZ currently has a Moderate Buy rating based on four Buy ratings and five Hold ratings. The average Verizon price target of $60.44 suggests 13.7% upside potential, with a high price target of $68, and a low of $56.

Conclusion

Verizon has undoubtedly entrenched itself in the telecommunications industry. Regardless of meager stock performance, it can be an attractive option to value-oriented investors as a fairly valued stock with substantial dividends that have only been growing.

Supported by solid fundamentals and exploiting the characteristics of an oligopoly, the same could certainly continue into the future and be proliferated by the successful execution of current and future partnerships and acquisitions, enhancing its already established economies of networking.

One could hope that the same quality, reliability, and future potential of services Verizon prides itself on will also be apparent in its stock performance.

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