AT&T Inc. (T) and Verizon Communications Inc. (VZ) stock have risen 12% and 13%, respectively, in 2016. They have both been undeniable leaders in the market. Yet, Verizon stock has gotten ahead of itself, with much of the company’s growth outlook tied to advertising, an unproven market that Verizon recently entered with the acquisition of AOL.
With that said, there’s little doubt that the U.S. wireless market is fully penetrated, and that growth opportunities are far and few between. However, T and VZ businesses have taken two different routes to address this problem; AT&T and Verizon stock will appropriately be tied to the effect of these respective routes.
Verizon spent $130 billion so it could take full control of its U.S. wireless business, buying the 45% stake it did not previously own from Vodafone Group Plc (ADR) (VOD). While the strategy seemed fine at the time, Verizon could not have predicted the wireless price wars and the pressure on margins it created.
Furthermore, Verizon’s debt has increased from $50 billion to $110 billion in its most recent quarter in response to its acquisition for full control of Vodafone and AOL. Yet, despite this significant rise in debt, Verizon’s revenue in 2016 is not expected to grow from 2015, nor in 2017 — stuck at $132 billion.
Meanwhile, AT&T has spent its fair share of money, and yes, the company’s debt has risen from $75 billion to more than $125 billion in the time since Verizon’s respective debt rise. However, AT&T has seen a significant effect to its business from the acquisitions of DirecTV and two Mexican wireless companies among others.
AT&T is expected to finish 2017 with revenue of $170 billion, 28% greater than what it created in 2014 prior to its purchases. Last year, AT&T’s free cash flow rose 60% to $15.8 billion, and is once more expected to grow double digits this year. The bottom line: AT&T is getting a nice return for its investments; Verizon is not.
AT&T vs Verizon Stock: Who Wins?
Both Verizon and AT&T stock have performed well, and both trade at very attractive valuation multiples. However, the outlook for these two companies makes all the difference, with T still growing and getting far more bang for the debt it was forced to raise. Moreover, the two companies have seemingly gone in two completely different directions as wireless subscribers in the U.S. have reached maturation.
Verizon is betting big on advertising, with the acquisition of AOL opening new doors for VZ to host ads across a number of web properties that operate on its network. VZ already launched Go90, but the over-the-top video service has not met high expectations, nor has it stood out against a slew of competitors like Sling TV, Netflix, Inc. (NFLX), Hulu, YouTube, etc.
Rumor is that Verizon is a likely suitor for Yahoo! Inc.‘s (YHOO) web properties, or potentially all of Yahoo. While I agree that the acquisition would be great for VZ’s advertising initiatives, it’s unlikely to move the needle on Verizon stock.
However, AT&T’s expansion into Mexico and Latin America create new opportunities to facilitate a big rise in overall subscriber count in both wireless and broadband services.
When AT&T completed its two acquisitions in Mexico, it had over 5 million subscribers that were mostly prepaid with nearly 70% wireless coverage. It cost AT&T $4.4 billion to establish this marketplace, and the company plans to spend another $3 billion to deliver 4G to 100 million Mexican consumers by 2018.
What AT&T has done is solidify itself as the No. 2 wireless service provider in Mexico, right behind America Movil SAB de CV (ADR) (AMX), which controls three-quarters of the market. However, AT&T enters Mexico unafraid to spend money, and with superior technology and a reliable network. Already, AT&T has added 1 million new 4G customers in Mexico, with a good shot to maintain such subscriber growth in the region.
All things considered, AT&T’s wireless network passes target 400 million consumers, 100 million more than Verizon’s network. Also, AT&T is a market leader in video, something Verizon can only dream of, while having significant video and broadband opportunities in Latin America.
When you put it altogether, it is evident that AT&T stock presents a better investment opportunity than Verizon stock, with T certain to outperform VZ long-term.
As of this writing, Brian Nichols was long T.
