Following the heady days of 2021 as blue-chip businesses enthusiastically bid up the retail revenge phenomenon, Verizon (NYSE:VZ) recently discovered all good things must come to an end — and that end came in the form of a harsh downgrade for VZ stock. MoffettNathanson’s Craig Moffett cut both its rating and price target for Verizon. In addition, even the Oracle of Omaha Warren Buffett weighed in indirectly.
First, CNBC reported pricing pressures stemming from intense promotional campaigns will likely cloud VZ stock. As a result, Moffett slashed VZ’s rating to “underperform” while lowering the price target to $41 from $55. On the news, shares tumbled quickly. At the time of writing, the security only needs to decline by 7% to meet the pessimistic forecast.
Per Moffett, Verizon’s intense promotional competition with its rivals has drawn the top-tier players into a race to the bottom. In some cases, a war of attrition delivers clarity to a market via the emergence of a standalone winner. However, the problem with VZ stock is that another competitor, T-Mobile (NASDAQ:TMUS), puts a face on the proverbial bottom.
Here, T-Mobile actually sets its periscope to a northerly direction, widening its competitive advantage in 5G, according to Moffett. Therefore, this development creates vulnerabilities for Verizon and the price-sensitive component of its customer base.
As if pressures from both ends of the competitive spectrum weren’t enough, recent Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) filings revealed that the Buffett-run conglomerate exited its investment in VZ stock. Previously, its stake was valued at $8.3 billion.
Marketing Alimony Crimps VZ Stock
While some investors may view the pessimism in VZ stock as a surprise, the Wall Street Journal’s Dan Gallagher would claim otherwise. In October of last year, the journalist cautioned Morgan Stanley analysts saw risks with the telecom sector’s marketing blitz.
Making matters worse, many promotions centered on technological upgrades that most consumers didn’t care for. According to the banking firm’s annual broadband and wireless survey, “only 4% of respondents cited ‘innovative technology’ such as 5G as an important factor in their choice of service.”
Nevertheless, at the time, the telecom giants remained undeterred, eschewing financial restraint for robust growth. These companies likewise threw promotions at potential customers, racking up subscription figures. However, with the euphoria of 2021 fading against the inflationary surge of 2022, VZ stock has struggled.
Fundamentally, VZ carries a higher premium than its peers. Further, as household spending power dwindles amid multi-decade high consumer prices, low-cost specialists can swipe a chunk of Verizon’s subscriber base.
Unfortunately, because of the decisions Verizon took earlier, it can’t effectively compete with the low-cost carriers. In other words, the past has come back to haunt VZ stock.
Why It’s Important
While Verizon faces an unenviable task of reducing its churn amid competition from both ends of the scale, MoffettNathanson points out that the winner in the telecom mess of 2022 could be T-Mobile. The research firm upgraded its price target for TMUS to $174 from $165.
MoffettNathanson expects higher margins and momentum in reducing churn and acquiring new customers. It maintains an “outperform” rating on TMUS.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
