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Verizon Communications Inc. continued to show stability in its wireless business despite generous iPhone promotions across the industry, but the company’s latest results only tell so much.
The telecommunications giant reported better-than-expected fourth-quarter earnings and revenue Tuesday morning, while offering an upbeat earnings outlook for the year ahead. Though the company saw lower-than-expected net subscriber gains, its churn rate remains below historical levels, suggesting that customer switching is fairly subdued in a good sign for wireless profits.
Verizon’s VZ, -3.26% “results and outlook reflect a stabilizing competitive environment,” wrote Citi Research analyst Michael Rollins, who rates the stock at neutral with a $62 target price. Verizon is calling for at least 3% growth in wireless services revenue, which Chief Financial Officer Matthew Ellis said would be “driven by our tiered unlimited plans, new customer contributions and ongoing strength in business.”
That outlook “supports a view that ARPU [average revenue per user] trends are improving, typically a harbinger of better equity valuations,” wrote MoffettNathanson analyst Craig Moffett, who has a buy rating and $66 target price on the stock.
The fate of Verizon’s stock is tied to much more than subscriber trends, however, and investors are left with some unknowns as they wait for the final results of a record wireless spectrum auction that will give carriers access to frequencies crucial for building out their 5G networks.
“We described last quarter’s results as ‘the calm before the storm of 5G,’” Moffett wrote. “These results feel more like the calm before the storm of the C-Band auction.”
Verizon shares are off 3% in midday trading Tuesday.
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Many analysts estimate that Verizon spent in the realm of $40 billion to obtain spectrum through the recent auction, a move viewed as necessary for the company’s network positioning but damaging to its balance sheet. Before the auction began, some expected that Verizon might only have to spend roughly half that sum to get the spectrum it needed, but the auction drew heavy bidding activity that pushed up prices.
“Deploying their new C-Band spectrum, which by any reasonable definition is very high frequency spectrum, will be very expensive,” wrote Moffett, who doubts that the company will be able to accelerate its capital spending to deploy the new spectrum as quickly as it can.
“In the real world, higher leverage will mean that capital spending will, by necessity, be pinched and stretched,” he continued. “Lower capital spending will mean it will take longer to deploy their C-Band spectrum, which, in turn, will mean Verizon will be slower to catch up to T-Mobile.”
He noted that the company’s 2021 capital-spending forecast called for $17.5 billion to $18.5 billion, which was below his own expectation for $18.7 billion.
For the latest quarter, Verizon reported net income of $4.72 billion, or $1.11 a share, down from $5.22 billion, or $1.23 a share, in the year-earlier quarter. On an adjusted basis, Verizon posted earnings per share of $1.21, up from $1.13 a year prior and ahead of the $1.17 that analysts surveyed by FactSet were modeling.
Verizon saw fourth-quarter operating revenue slip slightly to $34.69 billion from $34.78 billion. The FactSet consensus called for $34.45 billion. Verizon recorded $23.91 billion in consumer revenue, $8.05 billion in business revenue, and $2.30 billion in media revenue.
The company experienced wireless service revenue growth but saw lower wireless equipment revenue and declines in its legacy wireline products.
The media segment saw its first quarter of year-over-year revenue growth since the 2017 Yahoo acquisition, Verizon said in a release, “fueled by strong advertising trends.”
For 2021, the company anticipates adjusted EPS of $5.00 to $5.15. Analysts were expecting full-year adjusted EPS of $4.93.
Shares of Verizon have lost 2.1% over the past three months as the Dow Jones Industrial Average DJIA, -0.02% has climbed 11.9%.
