Is Verizon Stock Overvalued?

Verizon Communications Inc. (NYSE:VZ) is one of the largest telecommunications companies in the world. It’s a big player in the race to 5G that’s spending big on upgrading its U.S. fiber and cell network. This could be a key to the company’s overall growth over the next decade.

But this could already be priced into its stock price, leaving some analysts wondering, is Verizon stock overvalued?

The company has a history as a strong dividend stock, recently raising its payout by another $0.01 per share. It has a huge pile of cash, and it’s spending heavily on upgrading its 5G infrastructure, a strategy that paid off big in previous wireless generations.

We connect to Verizon’s data to determine if its 5G bet is enough to carry it through to victory in the latest battle of a long-standing telecommunications war.

Verizon Stock Barely Budged When The Market Fell

VZ share price barely went down when the rest of the market took a tumble. In fact, it lost more market value over the course of the early 2000s than it did during the pandemic.

Its stock price did drop to a 52-week low of $48.84 during the worst of the market fall. However, prices quickly rebounded to the $55 range before eclipsing the $60 per share mark during the holiday season. Ironically that resulted in flat year over year share price growth.

With the economy set to reopen, analysts are betting Verizon’s infrastructure buildout will provide better overall connectivity. It’s preparing for an environment that includes artificial intelligence (AI), the Internet of Things (IoT), and high-definition cloud streaming.

Had the market remained muted, Verizon (VZ) could have been a standout winner but instead it tends not to rise or fall to the same degree as high profile companies, especially technology stocks..

Investors may expect to see slower growth over the next few years as it spends heavily on the 5G build, but it is projected to continue paying its 4 percent dividend yield and may even increase payments again.

This is because Verizon has deep pockets. Here’s what’s inside.

Verizon Financials Look Good Year Over Year

Verizon Communications has a P/E ratio is around 13x. For the third quarter, the company posted $1.05 earnings per share, versus $1.25 in 2019’s same quarter. 

This put it at $7.63 EPS for the year as of the end of October 2020. Over the course of the next fiscal year earnings are expected to look considerably better when year over year comparisons are finalized.

Total revenue for the quarter was $21.7 billion from its consumer section, with impressive net additions in its Fios Internet subscribers.

It earned $7.7 billion from business customers and $16.4 billion from wireless customers, the only market segment that increased year-over-year.

Impressively, the company increased operational cash flow by $5.7 billion to $32.5 billion from the previous year. This is despite $14.2 billion in capital expenditures to support current customers while upgrading its backend architecture and infrastructure.

With $18.3 billion free cash flow and $9.0 billion cash in hand, it can continue its upgrades through the next two years while growing business.

But some fear it could face a downswing before that happens.

Is Verizon Valuation Too High?

Verizon’s P/E ratio is much lower than that of its archrival AT&T which trades at a 20x multiple; the telecom industry average is 25x as of the third quarter of 2020.

That shows analysts feel it may underperform in the next year, however it could also signal the company is undervalued by quite a bit.

It’s not only battling AT&T (T) and T-Mobile in the wireless arena, but it also has other business units to worry about.

The company owns major online media brands like AOL, Yahoo!, Engadget, and TechCrunch, and sold its HuffPost brand to BuzzFeed in November 2020. Dropping those assets is a move likely to be viewed as a positive by investors.

But the company’s spending is high, and it needs to bring in a lot of wireless growth to justify its long-term debt of over $100 billion.

That debt load will stifle short-term growth, but investors see a lot of long-term upside potential in the company.

Will Verizon Stock Drop?

The market crash was a great real-world example of how Verizon compares to the general stock market when it drops. COVID-19 took a 35 percent bite out of the market, but Verizon share price lost comparatively much less, about 20 percent.

Of course, its debt load bottlenecked it recovery potential, so it didn’t experience the growth of a company like Zoom (ZM). However, it recovered much faster than AT&T (T), which didn’t rally until after it declared war on Hollywood in December.

Verizon has plenty of partnerships in place, but it lacks the streaming content of its competitors. AT&T owns HBO Max, Comcast owns Peacock.

Verizon still depends on partnerships with Disney (DIS), Apple (AAPL), Netflix (NFLX), Spotify (SPOT), and others to help it compete with these offerings.

The company was known in prior generations for enabling and providing premium streaming content. While it’s building a solid hardware network, it’s going to need bigger guns in its online content. Otherwise, it will have trouble convincing users to migrate to its service.

What’s the point of fast internet, when you can’t connect to the best services?

Is Verizon Stock Overvalued? The Bottom Line

Verizon Communications is a legacy telecommunications company and one of only three major wireless data carriers in the United States. It’s aggressively spending on 5G infrastructure and architecture to support a future with autonomous vehicles, AI traffic cameras, augmented reality, and more.

This upgrade isn’t cheap, and it put a bottleneck on Verizon’s growth potential over the past several years. However, it’s a proven cash-generating machine that keeps money in investors’ pockets with a steady dividend payment and steady overall growth.

Its biggest problem is building something nobody comes to because it can’t connect to the proprietary content owned by its competitors. That will be the next battleground of the 5G wars, and Verizon will have a lot of money to spend once it buys out its current debt load.

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