After Earnings, Is Verizon Stock a Buy, a Sell, or Fairly Valued?

Verizon Communications released its third-quarter earnings report on Oct. 22. Here’s Morningstar’s take on Verizon’s earnings and stock.

Key Morningstar Metrics for Verizon

• Fair Value Estimate: $53.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Verizon’s Q3 Earnings

In the third quarter, Verizon’s wireless service revenue increased 2.7%, while phone sales continued declining. The firm added 81,000 net postpaid consumer wireless customers versus a 51,000 net loss a year ago. Adjusted EBITDA increased 2.1%, while free cash flow dipped slightly on higher cash taxes.

Why it matters: Verizon continues to deliver slow, steady service revenue growth as its market share lead narrows. Solid cost control and the drop in costly phone upgrades have also allowed the firm to expand EBITDA margins modestly throughout 2024.

• Revenue per consumer postpaid wireless account increased 4% year over year. During the quarter, Verizon added 209,000 net residential fixed-wireless broadband customers to reach 2.5 million customers, 50% more than a year ago.
• The firm took a $1.7 billion severance charge during the quarter as it continues to trim its workforce. Headcount will likely end 2024 at less than 100,000, down from more than 117,000 two years prior.

The bottom line: We maintain our fair value estimate of $53 per share. With Verizon trading more than 20% below this figure, we believe the stock is the most attractive of the three major US wireless carriers.

• The favorable structure of the US wireless industry is the primary basis for our narrow moat rating for Verizon. We expect smaller rivals T-Mobile TMUS and AT&T T to gradually gain share, limiting Verizon to 2%-3% wireless service revenue growth in the coming years.
• We expect pricing discipline will drive most of Verizon’s growth, allowing the firm to maintain EBITDA margins and grow free cash flow. Most recently, the firm cut the autopay discount on older wireless plans in half to $5 per line per month, taking effect this month.

The long view: Management also updated its broadband ambitions, calling for 8 million-9 million fixed-wireless customers by 2028 versus 4.2 million currently. Verizon also plans to pass 35 million-40 million locations with fiber over the long term, assuming the Frontier FYBR acquisition closes.

Fair Value Estimate for Verizon

With its 4-star rating, we believe Verizon’s stock is undervalued compared with our long-term fair value estimate of $54 per share, which is roughly 8 times our 2024 EBITDA forecast. Our valuation also implies an 8% free cash flow yield based on the firm’s performance in 2023. Higher cash taxes and interest costs will likely offset business growth and lower capital spending in 2024, leaving free cash flow roughly flat for the year.

We expect Verizon will gradually lose postpaid wireless market share as it prioritizes pricing stability rather than growth. Smaller rivals T-Mobile and AT&T have similar network resources and should be able to attract roughly the same number of customers as Verizon each quarter. This parity should naturally cause the firms’ market shares to converge slowly. With a rational competitive environment allowing for stable service pricing and increasingly modest phone credits, we expect revenue per postpaid customer will grow steadily in the coming years.

Read more about Verizon Communications’ fair value estimate.

Economic Moat Rating

Verizon’s narrow moat stems from cost advantages in its wireless business and the industry’s efficient scale characteristics. The firm has organized its business along customer lines, but we believe it is best understood along wireless and fixed-line dimensions. The wireless business produces about 70% of service revenue but contributes nearly all Verizon’s profits. We estimate wireless returns on invested capital were about 16% before 2021. With heavy investment to acquire additional spectrum in the C-band auction and subsequent spending to put that spectrum to use, we estimate wireless returns on capital have declined to the low-double digits, still leaving Verizon ahead of its cost of capital.

Verizon, AT&T, and T-Mobile dominate the US wireless market, claiming over 90% of retail postpaid phone customers. Solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base does require incremental investment in network capacity, a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about Verizon Communications’ economic moat.

Financial Strength

Verizon took on more than $65 billion of incremental debt in 2014 to finance the purchase of Vodafone’s 45% stake in the Verizon Wireless joint venture. Following that transaction, net debt increased to $106 billion, or 2.5 times EBITDA, prompting downgrades from the major credit rating agencies. At the time, management pledged to reduce leverage and reach its pre-buyout credit rating of A- within five years, which would have likely required net debt of less than 2 times EBITDA. The firm failed to meet this commitment, with dividends, acquisitions, and spectrum purchases offsetting cash flow.

Verizon paid dividends totaling $11 billion in 2023, equal to about 60% of free cash flow. Management expects net leverage to begin declining in 2024 as it uses excess cash to reduce net debt. We still don’t expect the firm to hit the high end of its leverage target until 2026 or 2027, depending on how much secured debt it issues.

Read more about Verizon Communications’ financial strength.

Risk and Uncertainty

Our Medium Uncertainty Rating reflects the volatility we think Verizon investors face relative to our global coverage. Verizon primarily sees regulatory and technological uncertainties. Wireless and broadband services are often considered necessary for social inclusion in employment and education. If Verizon’s services are deemed insufficient or overpriced, especially in response to weak competition, regulators or politicians could intervene.

Recent media reports have highlighted potential risks related to lead-sheathed cables commonly deployed in telecom networks into the 1960s. The liabilities and costs associated with removing these cables, if deemed necessary, are unknown today.

Read more about Verizon Communications’ risk and uncertainty.

VZ Bulls Say

• A focus on network strength over the past 15 years has put Verizon in an enviable position. Its wireless network provides the broadest coverage in the industry, and its reputation with customers is sterling.
• With the largest customer base in the US, Verizon Wireless is the most efficient carrier in the industry, delivering far better profitability than its rivals.
• Verizon is relentlessly pushing forward in its core business, expanding its fiber optic network and deploying 5G wireless technology.

VZ Bears Say

• Wireless technology is dramatically lowering the cost to build and maintain a network. Rival carriers have rapidly deployed new spectrum and technology to add coverage and capacity. Verizon’s network leadership is a thing of the past.
• Verizon’s fixed-line business is a disaster, earning minimal profits and facing years of high costs necessary to support these declining businesses.
• Verizon’s balance sheet isn’t the fortress it once was. Paying down debt will limit strategic flexibility and shareholder returns. Liabilities tied to lead-sheathed cable could add another headache.

This article was compiled by Renee Kaplan.