It is time for US telecom giant Verizon (VZ) to share with investors the results of its third quarter. The press release will cross the wire ahead of the opening bell, on October 21.
Analysts don’t seem to be expecting much from the New York City-based carrier. Consensus estimates are for a low single-digit contraction in both revenues and earnings. If delivered, these numbers would be roughly in line with what Verizon managed to deliver in the second quarter, which, in turn, was impacted by COVID-19 headwinds – i.e. store closures, increased costs with safety, etc.
Beyond the headline numbers, however, I will be asking myself a couple of relevant questions about the business fundamentals. Let’s explore both of them in more detail below.
How is the consumer?
Verizon has been facing headwinds on a number of fronts, from decreased advertising revenue in Verizon Media to lower spend by the SMID enterprise vertical within the business segment. But one important part of Verizon’s business, accounting for over one-fourth of total revenues last quarter, has stayed resilient: consumer wireless services.
Considering the COVID-19 challenges, consumer service revenues have remained surprisingly stable, while the revenue drivers still look solid. In the second period, Verizon added 72,000 wireless postpaid consumer connections, after losing a record half a million in the previous quarter. Churn dropped drastically, although ARPA (a measure of per-unit revenue) dropped slightly YOY for the first time since 2018.
Source: DM Martins Research, data from Verizon’s reports
My concern is that the consumer in the US may be facing financial stress or uncertainty that did not exist in the summer months. Take the results reported by the major US-based banks as reference. Consumer spending seems to have plateaued, as credit balances have dropped substantially and deposits have increased. I wonder how much the delays in additional fiscal stimulus may have impacted consumers’ ability or willingness to spend, and whether Verizon may feel the pinch this time.
How about the 5G opportunities?
The second topic of conversation that I believe to be very important is 5G. Verizon was featured in Apple’s (AAPL) October product refresh event when the Cupertino company unveiled the iPhone 12.
While I do not expect much of an impact from 5G on the carrier’s past results, the narrative around it should be interesting to pay attention to. Investors seem to agree, as Verizon stock spiked as much as 1.3% within 30 minutes of CEO Hans Vestberg taking the stage with his “5G just got real” speech, during Apple’s iPhone 12 announcement. See the chart below.
Source: graph by Yahoo Finance
The war for the minds, hearts, and wallet share of 5G users has started. Device subsidy seems to be the name of the game among all competing carriers. Otherwise, it looks like Verizon may have an advantage in speed, especially in mmWave service, but a disadvantage in geographic coverage – all according to PC Magazine.
I will be curious to hear a bit more from the management team about the 5G strategy, including a possible early read on consumer adoption following this month’s iPhone 12 launch.
Still a bull
I head into earnings season the same VZ bull that I have been for a while. Rather than the company’s short-term prospects, what attracts me the most to this stock is the cycle-agnostic nature of the business model and the recurring-like characteristics of the company’s revenues – even if the latter may still suffer during periods of severe economic distress. The low historical correlations between the stock’s and the market’s returns also help to build a case for diversification inside a growth portfolio.
Beating the market by a mile
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Disclosure: I am/we are long AAPL, VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.