How FiOS Threatens Verizon Stock Long-Term (VZ)

Verizon (VZ) stock investors may not realize it, but the company’s FiOS broadband internet and TV businesses are a complete mess.

How FiOS Threatens Verizon Stock Long-Term (VZ)Just recently New York City, New Jersey, and Pittsburgh have threatened to file suit against VZ for failing to deliver on deployment promises.

Verizon is often accused of partially delivering or not delivering service at all while still taking tax subsidies that boost revenue and profits.

Given the fact that these three areas alone account for a majority of VZ’s FiOS network, this is very alarming news, but that’s not the worst as it relates to FiOS and Verizon stock.

What’s So Bad?

The bottom line is that VZ’s management doesn’t seem to care about the future of FiOS. This is a company whose FiOS network is well penetrated through some of the largest metropolitan areas in the country, including throughout the northeast, yet CFO Fran Shammo and CEO Lowell McAdam have consistently said that declines in capital expenditures will come from FiOS and its wireline segment, as spending in wireless must stay robust.

The potential lawsuits and negative press for FiOS in its most important regions are perfect illustrations of how VZ doesn’t seem to be taking FiOS all that serious, and with FiOS responsible for more than 10% of the company’s revenue, this could be horrible for Verizon stock.

The Industry has Changed

Back when FiOS first rolled out, VZ was a leader, but today it is at serious risk of becoming a laggard, with the company completely out of touch with where the industry is headed.

Over the last 16 months Alphabet (GOOG, GOOGL) has rolled out Fiber, AT&T (T) with GigaPower, and most recent is Gigabit Pro by Comcast (CMCSA). Each of these services boast download speeds of at least one gigabit per second, which is more than 13x faster than FiOS’s fastest-selling 75 megabits per second service.

Fiber is already in three cities with another dozen planned for expansion, much like GigaPower, and Gigabit Pro has launched in Atlanta, California and Chicago. Hence, expansion is happening fast, and services are very cheap — Fiber costs $70 per month for video and internet whereas AT&T charges $120 for both services.

Meanwhile, Verizon doesn’t even offer 1 gigabit per second broadband speeds, and its prices are completely out of line with pricing trends by competitors. Verizon’s top FiOS speeds are 500 Mbps, half that of Fiber, and it costs subscribers $250 per month.

Therefore, with disgruntled customers and FiOS competitors quickly expanding throughout the U.S., Verizon’s FiOS business is a long-term risk for VZ stock.

VZ has Few Options for FiOS

Ultimately, Verizon must either invest to hike speeds, and thereby finish construction of its network, or lower prices substantially to compete. If not, that 10% of Verizon’s annual revenue created by FiOS could soon see a rapid reversal in growth as competitors penetrate FiOS regions. It’s not a matter of “if” but rather “when.”

Already, VZ stock’s FiOS revenue growth has slowed substantially. Just 16 months ago, FiOS revenue was growing upwards of 20%, but now it is at a mid-single digit growth rate. Therefore, with competition so fierce, and Verizon showing no willingness to cut prices or invest to upgrade download speeds, the company’s best option is to divest FiOS.

After spending $130 billion for full ownership of its wireless business, and recently selling wireless assets to Frontier for over $10 billion, Verizon has quickly moved in the direction of becoming a wireless-focused company anyways.

However, complete ownership of wireless has not had the profound effect on free cash flow that Verizon and investors had hoped for. That’s because a vicious price war broke out within the wireless space shortly after Verizon’s acquisition, thereby pressuring margins.

Given VZ’s now $112 billion in debt coupled with these operating problems in Wireless, and FiOS, Verizon would be best suited to divest FiOS before competition devalues the asset.

Verizon was able to get $10 billion for nonessential assets in three states. Therefore, one would imagine that wireline networks in New York, New Jersey and Philadelphia would be very valuable.

Fios_network
Source: http://verizonspecials.com/availability

For a company that’s willing to make proper investments and offer competitive prices, FiOS could be a real gem and a great acquisition. FiOS has 12.7 million combined internet and video subscribers. While significant, FiOS has 41.7% and 40.6% penetration of its internet and video network, respectively, leaving much room for growth with the right strategy.

What’s Best for Verizon Stock?

The bottom line is that the best way to boost Verizon stock value is a FiOS asset sale. VZ could then decrease debt, focus on wireless and not have to worry about competitors with much more aggressive broadband strategies.

If not, FiOS becomes a risk to Verizon stock.

With that said, until VZ makes this move, I would not be long VZ stock.

Yes, Verizon has the best wireless network, the most wireless subscribers and a real chance for long-term wireless growth via data consumption.

However, with FiOS responsible for 10% of VZ’s revenue, it could end up being a major drag on Verizon stock.

As of this writing, Brian Nichols owned shares of AT&T stock.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/10/fios-threatens-verizon-stock-vz/.

©2020 InvestorPlace Media, LLC