by Tom Taulli | March 6, 2013 9:15 am
Verizon (NYSE:VZ) was once a stodgy phone operator, but the company has turned into a leading mobile carrier in the U.S. Last year, for example, the company generated nearly $76 billion from its mobile business.
Shareholders have certainly benefited as well; the stock is near a 52-week high. In fact, over the past three years, the average return was a hot 25%.
But can Verizon keep up the momentum? After all, the mobile industry could be getting saturated … and the competition is getting tougher. Well, let’s take a look at the pros and cons:
The Network. While the investments have been staggering, Verizon has built a standout mobile network in terms of quality, reliability and the customer experience. Over the past five years, the company has upgraded the system for the next generation of 4G LTE, while its geographic coverage is currently at 476 markets — almost 90% of the U.S. population. With the largest 4G LTE network, Verizon can offer the kinds of services that customers expect, including movie-streaming. With that in mind, it should also be no surprise that Verizon continues to grow its base of the smartphone market. In Q4, the company activated 9.8 million devices, which was a record. About 65% were for the 4G LTE network, while Apple (NASDAQ:AAPL) iPhones accounted for 6.2 million units.
Add-On Services. To find growth, Verizon has entered new markets. For example, it has a full-blown TV service — which has 4.7 million subscribers at the end of last year — and a broadband offering — which has 5.4 million subscribers. In other words, Verizon offers a “triple play” of phone, Internet and TV. One of the most interesting opportunities for Verizon is to leverage its massive wireless user base. To this end, it can offer premium cloud services like storage or even payment systems. These could be key in bumping up the average revenue per user.
Negotiation. The smartphone business has been a double-edged sword. While it has boosted revenue growth, it has still been a drag on margins since Verizon has to front large subsidies for the devices. Still, the company is trying to shift the burden to handset-makers like Apple and Samsung. How? Probably with the help of more competition. Microsoft (NASDAQ:MSFT) is very eager to get its Nokia (NYSE:NOK) phones within the Verizon network, which may mean more generous terms, while BlackBerry (NASDAQ:BBRY) also recently launched a new phone that could provide another point of leverage.
Competition. For the most part, Verizon’s main competitor has been AT&T (NYSE:T). The other operators were mostly regional threats that did not have national scale. Late last year, though, there was a major change: Sprint (NYSE:S) agreed to a deal for $20 billion in financing from Softbank. Thanks to that, the once-struggling operator will now have the wherewithal to compete against the big players so Verizon could see pressure on pricing and phone sales.
Market Saturation. The smartphone category has certainly been a source of tremendous growth for Verizon … but that cannot last forever. Keep in mind that over half of that U.S. population already has a smartphone. Inevitably, the growth rate will slow down, which will put pressure on the mobile carriers. This is why Verizon needs to be successful with its add-on services … but that will not be easy. The company faces tremendous competition from in these categories from cable companies and cloud app players..
Pensions and Benefits. Verizon is a fairly old company, with legacy assets from its telecom roots. The result is that the company has substantial ongoing obligations for pensions and healthcare benefits. As of December, the company had 183,400 employees and 205,600 retirees to support. So far, Verizon has sufficient cash flows to handle the obligations … but over the next decade, as the Baby Boomers continue to retire, the obligations could grow at significant rates. In other words, this may hurt the bottom line.
Even with the competition and potential market saturation, Verizon should continue to do well. If anything, the company may be able to boost margins by reducing phone subsidies. There should also be a nice lift from add-on services.
Verizon also has an attractive dividend, which currently yields north of 4%. So as long as the mobile revolution continues — which seems like it should for at least the next couple years — Verizon’s shareholders should continue to benefit.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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