To most Americans in the western two-thirds or three-quarters of the country, Verizon Communications Inc. (VZ) is best known as one of the big four national mobile phone service providers — someone to contemplate signing with when one’s T-Mobile U.S. Inc. (TMUS), Sprint Corp. (S) or AT&T Inc. (T) contract expires. Yet to a huge customer base along the Eastern seaboard, Verizon is more than just the brand name that appears when you power up your mobile device. The company is the provider of choice for landline telephony, T.V., and internet for tens of millions of subscribers, and has been since its inception. Even when landlines can seem faintly antiquated, a relic from a less connected era, that legacy technology is still responsible for a huge portion of Verizon’s revenue. (For more, see: How Cell Phones Have Changed Your Budget.)
Although Verizon can trace its history back to the 19th century, it’s existed in its current incarnation since 2000. The company resulted from the union of two of the “Baby Bells”, the regional phone companies created in the wake of the 1982 breakup of the since-reconstituted AT&T. Upon its creation, Verizon immediately became the nation’s largest local phone company, a position it still enjoys today. And if you indeed think landline (or in the industry parlance, “wireline”) phones are going the way of the wooly mammoth, you might be surprised. Revenue in that sector grew 4.9% last year, the bulk of that due to Verizon’s patented FiOS technology. (For related reading, see: What Is A "Baby Bell?")
Big Profits From FiOS
What’s FiOS? It’s the brand name of Verizon’s fiber-to-the-premises bundled (i.e. T.V., internet and phone) service, boasting upload and download speeds that make most standard cable connections look glacial. Catering to customers with more disposable income than time, and with prices ranging as high as $330 a month, profit margins on the service can approach 50%. FiOS growth is one factor that that’s contributed to Verizon’s stock price doubling over the last four years, as it begins to approach its historic zenith of 1999-2000.
Still, ever-growing mobile operations represent the bulk of Verizon’s business. And the company doesn’t mind making gargantuan investments in anticipation of future mobile growth. In 2013 Verizon spent $130 billion to buy back the 45% interest in Verizon Wireless held by U.K.-based telecommunications giant Vodafone Group plc (VOD), thus giving Verizon full ownership of what chairman and chief executive officer Lowell McAdam calls “the crown jewel of the global wireless industry.” The reacquisition was the third-largest business deal in history, and the second-largest involving a North American company, trumped only by the ill-fated AOL/Time Warner merger of 1999. (For related reading, see: 5 Biggest Acquisition Failures Of All Time.)
Wireless Revenue Still Growing
Wireless revenue increased 6.8% over the last fiscal year, a respectable number as growth inevitably cools while the industry matures. But more important than solidly rising revenue are the massive profit margins generated by Verizon’s wireless operations. Operating income margins reached 35% in the most recent quarter for which numbers are available, demonstrating how lucrative the business of buying and reselling space on the wireless spectrum is.
Nor is the wireless market anywhere near full-penetration. Verizon’s own documentation states that 60% of the world has no access to the internet. This might come as a surprise to the technologically adept readers of Investopedia, but smartphones and the accompanying megabytes of data accessible by said phones are the exception, not the rule. Verizon thus predicts that over the next few years, “growth will […] derive […] from an increase in […] smartphones, tablets and other Internet devices […] including continuing to migrate customers from basic phones to smartphones.” (For related reading, see: How Warren Buffett Made Berkshire Hathaway A World-beater.)
The Reason Why Smartphones Are Often Free
There’s a reason why Verizon sells Apple Inc.'s (AAPL) 64GB iPhone 5s for barely half of its true retail price. Smartphones and tablets generate revenue for a company such as Verizon faster than almost anything else can. That little hexahedron of anodized aluminum in your pocket is the best salesperson Verizon ever had. Recent figures show that the company’s wireless revenue — which comprises two-thirds of its total revenue — is driven more and more by service (and correspondingly less and less by equipment) every year. As important and indispensable as you think your smartphone or tablet might be to you, it’s even more vital to Verizon. (For related reading, see: The Real Cost of Owning a Smartphone.)
So what happens once everyone has a mobile phone and an internet connection, and Verizon (and its competitors) runs up against the limits of growth? Management’s already thought of this, and the answer is “business-to-business.” Verizon’s latest endeavors include selling technology to auto manufacturers and healthcare providers. The goals are ambitious — connecting self-driving cars, remotely diagnosing mechanical problems, sending information from biometric devices to their wearers’ physicians — but the idea is to eventually grow Verizon’s often overlooked enterprise services division. (For related reading, see: The Mobile Device Market is Undergoing a Seismic Shift.)
The Bottom Line
Consumers don’t typically think of Verizon as a business colossus, and yet it is. With a market capitalization of over $200 billion, a stock price with plenty of room for growth, and a price/earnings ratio that barely reaches two digits (before the decimal point), Verizon is one of the least publicized yet most robust components of the Dow Jones Industrial Average. The company’s pervasive growth, modest debt load and high profitability should keep it ensconced there for some time.