Verizon Communications Inc. (VZ) has been one of the market’s perennial laggards, underperforming both the S&P 500 and Dow Jones Industrial Average over the past five years. But the telecom giant’s recent unveiling of its 5G wireless service and other positive trends promises to usher in a brighter future that has not yet been fully accounted for by the market. “I don’t think that most people, or institutions, or money managers, have grasped, yet, just what is happening,” wrote Mark Grant, the chief global strategist at investment bank B. Riley FBR, as reported by Barron’s.
How 5G Wireless Will Drive Verizon’s Growth
- Source: Barron’s5G offers more than four times as fast as the average U.S. home broadband speed.
- Speeds up to one gigabit per second.
- Will become industry standard by 2020.
- Potential power shift from cable companies to wireless carriers.
Explaining the implications of the introduction of 5G wireless service, Grant added, “This is not just an advancement in speed but speeds that are so fast that they will totally change connectivity, and with that, totally devastate some existing industries while adding massive revenue growth to the bottom line of other industries.” With such revolutionary potential, expectations that Verizon’s stock could yield a 20% return, including dividends, are not unreasonable.
What it Means for Verizon
The leap from 4G to 5G is expected to be much starker than the previous leap to 4G, as 5G means speeds that would allow wireless carriers to compete with cable companies to offer residential broadband service. But with Verizon’s recent 5G launch into just four markets so far, it will likely take more than a year before the new wireless service really starts to produce significant results on the bottom line. Working out the kinks in the 5G technology, as happened with 4G, may also take some time. But the mere potential will likely boost the company’s current market valuation of $222.4 billion and an outperforming stock. (To read more, see: 5G: Why Traditional Cable Could Beat Verizon, AT&T.)
Industry consolidation could also help reduce the risk of a price war among major competitors. Regulators are currently in the process of considering a proposed merger between T-Mobile and Sprint. While those two companies are trying to convince regulators that their combination, which would make them similar in size to Verizon’s primary competitor, AT&T, and thus provide customers a choice between three major wireless carriers rather than just two, such consolidations generally make price wars less likely. (To read more, see: Sprint Dips After FCC Delays Merger With T-Mobile.)
Verizon’s Stock Vs. Dow: Getting Stronger
|Stock/Index||YTD Performance||% Change from this Year's High|
|Verizon||+ 1.27%||- 2.5%|
|Dow Jones Industrial Average||+2.15%||- 5.6%|
Source: The Wall Street Journal, Yahoo! Finance, as of 4pm EST 10/15
Other good news include industry revenues that rose 2% year-over-year in the second quarter, the first increase in four years, and the relative strength of Verizon’s stock in the most recent market selloff. Unlike the S&P 500 and the Dow, which have both plummeted around 6% over the past 3 to 4 weeks, Verizon is essentially flat over the same period.
While the future is looking brighter, investors may want to remain skeptical based on past hype over Verizon’s outlook that failed to translate into outperformance for the company’s stock. Investors will want to see more positives in the company’s Q3 earnings report, slated for October 23.