VZ - Verizon: The Bull Is About To Strike

2023-06-26 11:00:00 ET

Summary

• The threat posed by MVNO companies has been overstated and exaggerated.
• Verizon is not under threat by the cable companies, contrary to what the bears may suggest.
• This is a good time for investors to scoop up Verizon's shares, while they're still discounted due to the panic-driven selloff.

Verizon's ( VZ ) shares have declined nearly 30% in value over the last year, and it seems like investors have grown wary of intensifying market competition. Specifically speaking, cable companies are launching wireless services on the back of wholesale network deals, which many suspect, will hinder Verizon's growth. At the outset, this does seem like a legitimate bear case. But scratch the surface a little and a different picture emerges. In this article, I'll explain how MVNO wireless offerings aren't a threat to Verizon in the longer run and why the stock makes for a good buy at its discounted levels. Let's take a closer look to gain a better understanding of it all.

MVNO Threat

Let me start by saying that Verizon has been selling its surplus wireless network capacity in wholesale, to other telecom companies such as Comcast ( CMCSA ), Charter Communications ( CHTR ) and DISH Network ( DISH ). These telcos are termed as Mobile Virtual Network Operators or MVNOs. They essentially pay a bulk fee to Verizon and white label its network capacity, to launch wireless networks with their own branding.

Although Verizon doesn't disclose the financials associated with these deals, we know that the telecom giant is at least able to monetize its surplus wireless network capacity this way. The cable companies, on the other hand, get a swift entry into the wireless network industry, or expand their existing network capacity swiftly, without having to incur humongous amounts of capital expenditure. So, it's been a win-win situation for both so far.

However, the situation now has evolved and these MVNOs have registered significant wireless subscriber additions. To put things in perspective, Charter, Comcast and DISH, which are traditionally cable companies, had a collective wireless subscriber base of 19.55 million in Q1 2023, which was up by 971,000 on a sequential basis. These numbers look huge at first glance, and they give the impression that these cable companies will grow at Verizon and AT&T's expense. But while that's a legitimate thought process, the ground reality just isn't as dire as many believe it to be.

Assessing the Threat

Let's approach the counterargument in a step-by-step manner. Per our database at Business Quant, the subscriber base of all three cable companies is just paltry compared to AT&T ( T ) and Verizon's. If you notice, the subscriber base of cable companies is hardly visible in the chart below when we plot Verizon and AT&T adjacent to them.

Granted the concern is about subscriber additions by these cable companies, but the point I'm trying to make here is that the growth of cable companies in the wireless space, isn't an existential threat to Verizon or AT&T yet.

If Verizon were to cut prices to compete with the cable players, it would be doing more harm than good. It'll be under-monetizing its massive subscriber base and hurting its revenue, only to limit the growth of new MVNO entrants. So, I believe Verizon's management is doing the right thing by not reacting to this new competition, by keeping prices steady.

Secondly, we've to understand that these telecom companies are striking wholesale deals with Verizon. This means the latter is still getting paid by these MVNOs. If they increase their dependency on Verizon's network or any other network for that matter, the network carriers' revenue will see an uptick eventually.

More to the point, if these cable companies grow enough to threaten Verizon in the first place, Verizon can always hike its prices and render MVNO route less desirable. At that point, these cable companies would be left in the middle of nowhere. They'd have to agree to Verizon's terms and hurt their financials along the way, or arrange for a massive cash infusion by raising debt or diluting shareholders, to ramp up their own wireless network rollouts.

Fourth, these MVNOs are much smaller in size and I don't think they have the financial bandwidth to roll out nationwide 5G mmWave. For instance, Verizon's capital expenditure in the last 4 quarters alone amounts to over $23 billion which is gigantic in comparison to cable companies, Charter, DISH, and Comcast. So, I contend that these cable companies will struggle to scale after a point.

Lastly, shares of Charter and DISH have been on a downward spiral for the better part of the past year. This is counterintuitive - their shares would've rallied if they truly had unlocked a new growth engine and posed a legitimate threat to Verizon's market share. But their incessantly dropping stock price suggests that Charter and DISH investors aren't convinced of their wireless businesses growing manifold.

Altogether, I don't think Verizon's business is at risk due to its MVNO partners, anytime in the near future. The cable companies can nibble away chunks of the lower-priced wireless market, but they won't necessarily represent a threat to Verizon's business in a noticeable way anytime soon.

If they grow fast enough to hurt Verizon's business in the future, Verizon can always defend its turf by engaging in a price war, hiking its wholesale network prices and stop sharing its surplus network capacity which will essentially force these MVNOs to increase their capital expenditure to continue growing. So, Verizon is in a strong position operationally and financially.

Final Thoughts

Verizon's shares are trading at 1.1 times the company's trailing twelve-month sales. This is quite low on a standalone basis. On a relative basis, Verizon is more or less valued at par with its major telecom peers such as AT&T. And on a historical basis, Verizon's P/S multiple has declined considerably in the last 2 years. The stock used to trade at a P/S multiple of 1.9 times, but it has declined to just 1.1 times due to a barrage of speculative bearish concerns.

In light of its low valuation and its continuing growth (as highlighted in my prior article here ), I reiterate my bullish stance on Verizon. Investors with a multi-year time horizon can consider accumulating Verizon's shares on potential price corrections. Good Luck!

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