Source: PaxForex Premium Analytics Portal, Fundamental Insight
Verizon, the leading telecommunications company in the United States, recorded an impressive $137 billion in revenue during 2022. In comparison, its closest rivals, T-Mobile and AT&T, achieved revenues of $80 billion and $121 billion, respectively.
However, what's fascinating is that despite its substantial revenue, Verizon's market capitalization stands at approximately $140 billion. This valuation represents just over one times the estimated revenue for the current year, which is around $135 billion. Additionally, Verizon's stock trades at a modest multiple of seven times its projected future earnings, making it an attractive investment opportunity. Investors are further enticed by its substantial forward dividend yield of 7.7%, enhancing its appeal in the market.
Verizon's current low valuations are a result of its stock price declining by over 30% in the past decade. The company faced challenges in gaining new wireless subscribers and keeping up with T-Mobile and AT&T in the competitive 5G market. Its heavy reliance on promotions, new unlimited plans, and subsidies also put pressure on its margins.
Although Verizon doesn't expect these headwinds to fade anytime soon, it has a history of weathering economic downturns since its predecessor, Bell Atlantic, was spun off from the original AT&T in 1984. Despite this, the question remains whether Verizon has the potential to recover and become a trillion-dollar stock alongside the market's tech giants over the next three decades.
Currently, Verizon's valuations are at multi-year lows. Prior to the pandemic, its stock traded at healthier levels of about two times sales and 15 times earnings. If the valuations were to rise to those levels again, Verizon could potentially achieve a $1 trillion market cap by generating $500 billion in annual revenue.
However, to grow its revenue from $137 billion in 2022 to $500 billion in 2050, Verizon would need to achieve a compound annual growth rate (CAGR) of 5%. While this growth rate seems attainable, it is essential to note that Verizon only managed an anemic CAGR of 1% between 2012 and 2022. If the company continues to grow at a CAGR of just 1%, it would take well over a century to reach $500 billion in annual revenue.
Even a growth rate of 1% might be too optimistic for Verizon. Analysts project that from 2022 to 2025, its revenue will rise at a CAGR of just 0.3%, while its earnings per share, impacted by aggressive promotions and loss-leading plans, are expected to decline at a CAGR of negative 1.5%. With these projections, it appears highly unlikely that Verizon will come close to joining the trillion-dollar club by 2050.
Rather than speculating on Verizon becoming a trillion-dollar stock, investors should direct their attention to the company's three significant challenges. Firstly, Verizon's core wireless business is facing difficulties in acquiring new subscribers. While it only added 201,000 postpaid phone subscribers last year, its competitors like AT&T gained 2.9 million comparable subscribers, and Verizon itself lost 127,000 subscribers in the first quarter of 2023.
Secondly, to attract new subscribers, Verizon must resort to margin-crushing strategies, but it faces strong competition from AT&T and T-Mobile, which are employing similar cutthroat tactics. Additionally, Verizon needs to invest heavily in expanding its 5G network to keep up with T-Mobile's clever utilization of lower-band spectrums, resulting in a larger 5G network coverage than both Verizon and AT&T. These challenges may put pressure on Verizon's operating margins and profits in the coming years.
Lastly, a major concern for Verizon is its substantial unsecured debt, amounting to $132 billion as of the first quarter of 2023. This debt mainly stems from its $130 billion buyout of Verizon Wireless (formerly a joint venture with Vodafone) in 2014. As long as interest rates remain high, Verizon's inability to significantly reduce this debt will likely make it less appealing to investors. The company's net unsecured debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.7 raises concerns about its financial health.
Given these challenges, it is unlikely that Verizon will outperform the market in the coming decades. The company has saturated its core markets, which will force it to compress margins to maintain its leadership position. Moreover, struggling to generate enough cash to reduce its debt while continuing to pay consistent dividends will likely lead investors to view Verizon as a high-yield trap. Consequently, investors may turn their attention to more promising blue-chip dividend stocks instead of considering Verizon as a viable long-term investment option.
As long as the price is above 31.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 33.88
- Take Profit 1: 36.00
- Take Profit 2: 39.00
Alternative scenario:
If the level of 31.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation:short position
- Entry point: 31.00
- Take Profit 1: 29.00
- Take Profit 2: 26.00
