Telecommunications giant Verizon Communications, Inc. (VZ) has been regaining momentum with the gradual reopening of the economy. The stock has gained 3.9% over the past month. While the demand for personal broadband services allowed the company to maintain a steady revenue stream, its 5G networking operations came to standstill in 2020 due to COVID-19 lockdowns and social distancing requirements. As a result, the stock has declined 4.1% over the past six months, and 5.7% over the past three months.
However, VZ has resumed its role as a leading competitor in the 5G race; it became the second company to launch the next-generation connectivity in the United States in April 2019.
With massive spending to increase its spectrum coverage and nationwide connectivity deployment, VZ is expected to live up to its position as one of the top three telecom giants operating in the United States.
Here’s what I think can shape VZ’s performance in 2021:
Accelerated 5G Deployment
VZ acquired 161 MHz of C-band during the spectrum auction on March 10 to expand its mobility and broadband services. The acquisition has increased the company’s existing mid-band spectrum holdings by 120%, which is aligned with its goal of expanding 5G bandwidth to more than over 100 million people over the next 12 months. VZ was the biggest spender in the spectrum auction with a total purchase of $52.90 billion. This follows VZ’s $45 billion commitment to secure 5G airwaves in a government auction on February 24, 2020.
VZ expects to expand its 5G connectivity to over 250 million people by 2024. Moreover, the company aims to expand its 5G broadband product to nearly 15 million homes by this year, and to more than 30 million homes by the end of 2023. VZ projects Verizon Private Network Connectivity to be valued at $10 billion by 2025.
High Profitability
VZ’s trailing 12-month gross profit margin of 60.09% is 17.9% higher than the industry average 50.98%. Its trailing 12-month EBITDA margin and net income margin of 37.51% and 13.88%, respectively, are significantly higher than industry averages.
In addition, the company’s trailing 12-month ROE, ROA and ROTC of 27.55%, 5.62% and 9.41%, respectively, compare favorably with industry averages.
Consensus Ratings and Price Target Indicate Potential Upside
VZ has an average broker rating of 1.84, indicating favorable analyst sentiment. Of 28 Wall Street Analysts that rated the stock, two rated it Strong Buy and 6 rated it Buy.
Analysts expect VZ to hit $60.86 soon, indicating a potential upside of 10.1%.
POWR Ratings Show Promise
VZ has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
VZ has a grade of B for Stability and Quality. The stock has a beta of 0.47, indicating relatively lower volatility, which is in sync with the Stability grade. Also, the company’s Quality grade is justified given its high profitability.
VZ is ranked #2 of 26 stocks in the Telecom - Domestic industry. In addition to the grades I’ve highlighted above, you can check out additional POWR Ratings for Sentiment, Momentum, Value and growth here.
Check out other top-rated stocks in the Telecom – Domestic industry here.
Bottom Line
Despite being one of the biggest telecommunications and broadband operators in the United States, VZ’s moderate growth and high debt (more than $129 billion) have been major causes for concern. However, given the average overhead costs in the telecommunications business and the current historically low interest rates, the company’s debt burden is not as grave as it appears on paper. Also, the company’s high stakes in the nationwide 5G deployment are projected to be a turning point for the company because it is actively investing to become the largest 5G supplier in the country within the next couple of months. With the highest spectrum and airwaves availability, we think VZ is poised to become the largest telecom operator in the country.
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VZ shares were trading at $55.65 per share on Thursday afternoon, down $1.43 (-2.51%). Year-to-date, VZ has declined -4.26%, versus a 5.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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