Verizon (Symbol: VZ) is one of the companies I’m looking at for the Financial Rebel Fund. Smartphone use is growing fast in 2010 and since it’s still a small part of the overall mobile market, there’s plenty of room for growth.
In the United States, two companies usually come to mind when thinking of mobile phone networks: Verizon and AT&T. I’ll be covering AT&T over the weekend.
Note: As of this writing I do not own stock in Verizon.
Verizon reported disastrous Q1 2010 earnings a few months ago, which looks alarming on the surface. However, when you look at why the earnings were lower, the picture clears up a bit. The earnings were 42 cents lower because of:
According to Standard & Poor’s, they believe the fair value of Verizon stock is $23.30. On July 15, 2010 the stock closed at $26.90—almost $1 over its 52-week low. Looking over the past couple of years of pricing data, I think getting Verizon around $27 per share is perfectly acceptable.
Verizon’s dividend yield, which Standard & Poor’s said was secure, is about 7.2%. The stock, with today’s yield and a historical viewpoint, looks to be undervalued.
What really has me interested is smartphone use. At some point in the not-so-distant future, I think most phones will be in this category—perhaps all of them. There’s tremendous room for growth.
While Apple’s iPhone ushered in a whole new excitement for smart phones, there’s change on the horizon. Features that were once new and interesting to consumers are now in use or coming on other phones. Speaking of the iPhone, it has a serious competitor—Google. The Android OS has evolved very well in 2010 and 2011 could be a tipping point. This is very important for Verizon’s growth. Just today Verizon started selling Motorola’s Droid X and many other Andriod OS phones are coming to market later in 2010.
There’s also rumors (as usual) of Verizon getting Apple’s iPhone in 2011. It could happen, because Apple will be looking for ways to combat the growth of Droid smartphones and at some point Apple will need to reach more customers to sustain expected growth levels. Many owners of the iPhone “jumped ship” and signed up with AT&T, but that movement won’t happen forever and may already be slowing down.
Currently, 30% of Verizon customers have some sort of 3G device, but only 17% of their customers have a smartphone. Again, lots of room for growth and profit.
I’ve also been monitoring app development on Andriod devices, which is growing fast. In fact, InformationWeek has an article (released July 15, 2010) about the Android Market having over 100,000 apps, which means it has doubled over past 2 months. According to the article, there have been over 1 billion app downloads.
Google has also released a platform enabling just about anyone to make Android apps, without knowing any programming. The platform is still in beta, but it could be a huge catalyst to the app count. Of course, app numbers are great as visual candy, but its the number of quality apps that matters most.
FiOS is Verizon’s bundle of TV, Internet and wireline phone service. Last quarter, Verizon gained 185,000 new Internet customers (3.6 million total) and 168,000 new TV customers (3 million total). Market penetration rose about 2% and revenues about 22% for the quarter.
Verizon’s FiOS generates $142 ARPU (average revenue per user), Their Q1 2010 ARPU for wireline services was $78.45, which is a 12.3% increase from the same quarter last year.
The focus on FiOS growth should lead to increased penetration and profits—Verizon reported a 40.1% FiOS growth year over year.
The talk of 3G is slowly beginning to fade and 4G is coming into focus. Right now Verizon is working to deploy a LTE 4G network on a mass scale. The company has announced that it plans to launch this network in 30 major markets by the end of 2010—100 million people will be covered. And the remainder of its 3G customers will be covered by 2013.
It looks as if Verizon might lead rival AT&T in this area.
Verizon’s earnings come out in a few days (July 23, 2010), so I will be very interested to see what is reported. In the smartphone space, Verizon is doing well without the juggernaut that is the iPhone on its network. Given the Andriod OS’s evolution this year, I’m not convinced that Verizon should bend over backwards to get the iPhone on its network. It may turn out that Apple isn’t the one with the negotiating power in that deal.
The big question is one of new customers. If Verizon gets the new iPhone, just how many new customers will come? Hopefully, Verizon won’t “overpay” for the luxury of having the iPhone.
Even though Verizon’s stock and sector haven’t done well of late, I like Verizon as a longer-term investment. They are a solid company with a lot of growth potential. My biggest concern is pricing structure for some of their services, which could see increased pressure from competition. However, Verizon can combat this by leading the way in mobile network technology and quality.
And the fact that their dividend is stable is a huge plus to me. If I were to buy Verizon stock for the Financial Rebel Fund, I wouldn’t hesitate at any price under $27. However, I’d like to get in around $26 or lower if possible. Given upcoming earnings, it might be best to wait for a pullback as a signal for entry. Look for more about Verizon after their earnings for Q2 2010 are released.
Additional Sources:Reports and information from Verizon’s investor relations center.
My name is Jason A. Martin. I'm an investor/trader, financial writer and entrepreneur. This is my blog. I also run a social media integration & cross-media design company. If you'd like to follow me on twitter, here's the link: Jason A. Martin
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My name is Jason A. Martin and this is my investment blog. Back in Jr. High School I fell in love with an electrical wiring company's stock on Wall Street. After following the stock daily in the papers—the Internet wasn't around back then—I sent them a letter and they sent me back all sorts of wonderful information about their company.
In High School, we had a stock market contest. All the kids were picking companies that made stuff they consumed. When I announced my beloved company, I was laughed at. Little did they know that my company was going to be the subject of a takeover soon.
Long story short, I won the contest and have made money in the stock market, through real estate investing, currency trading and so forth.
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