Verizon Communications Inc. (NYSE:VZ) had a year to forget in 2017, as the company’s shares flatlined. Although, it could have been worse — AT&T Inc. (NYSE:T) lost 8.5%. But why the poor performance for Verizon stock?
For the most part, the big issue is the competitive environment. The fact is that the mobile market in the U.S. is fairly mature. So the brutal jabs from rivals like T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) have had a negative impact.
In the meantime, VZ stock has been weighed down by the need for substantial investments. The company has been preparing itself for a 5G world. And yes, Verizon has been doubling down on digital assets, such as Yahoo and AOL (the overall business has been rebranded as Oath).
But then again, all these are focused on the long term, right? And perhaps this means there is an opportunity here with Verizon stock? Actually, I think so.
Verizon Stock Advantage #1 – Moat
When it comes to the telecom industry, one of the most important factors is scale. It allows for a better customer experience but also lower costs.
Verizon has shelled out a whopping $111 billion to build its network (since 2000). The result is 98% coverage in the U.S. mobile market, and the company leads in the all-important 4G LTE category.
The elimination of the net-neutrality system is likely to provide a nice benefit to the network. Verizon should be able to offer more services and data plans with higher margins.
Something else: The rollout of 5G should help provide more revenue opportunities. For example, Verizon is already leveraging mobile networks to provide home broadband services. This could be a disruptive approach to get an even bigger piece of the lucrative market away from other cable providers like Comcast Corporation (NASDAQ:CMCSA).
Verizon Stock Advantage #2 – Growing Digital Opportunity
Currently, Oath has roughly 5% of the digital ad market, which is dwarfed by Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL). But this base is likely to grow over the years, as Verizon will benefit from synergies between their mobile business and video assets. The current customer base is roughly 1 billion, and the business generated $2 billion in revenues during the third quarter. Keep in mind, however, that the company thinks the user base can hit 2 billion in three to five years.
Yet the digital opportunity is about more than just consumers.
Verizon is also making a play for the enterprise market. To this end, the company has acquired companies in areas like telematics for autos (this has included acquisitions for FleetMatics and Telogis). There have also been investments in the Internet of Things segment.
Verizon Stock Advantage #3 – Valuation and Dividend
Verizon continues to crank out strong cash flows, which came to $17.2 billion during the first nine months of 2017. And this should continue for some time.
Consider, also, that the company plans to slash $10 billion in costs during the next four years. This will be the result of adopting zero-based budgeting systems, which have proven effective in mature industries like consumer products.
Another nice attraction of Verizon stock is the dividend, which is currently at 4.4%. There have been increases for the past 11 years.
And finally, the valuation on Verizon stock is reasonable, with the price-to-earnings ratio at 13X. This is an attractive level in light of key factors like the recent improvement in subscriber numbers, the expected cost-cutting and the benefits of the digital strategy.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
