3 Reasons to Fear Peaking Verizon
Investors are flocking to telecom giant Verizon (VZ) - Get Report , lured by nine straight years of solid and growing dividends, as well as juicy profits of nearly 20% this year. The stock has already risen above many analysts' 12-month price targets.
The $225 billion market cap company is slowly transforming itself from a phone service to a digital powerhouse. Verizon is one of the top contenders to purchase Yahoo. That acquisition would mark a big shift for the company, which already owns AOL. It could also mean some potentially big, additional profits for investors.
However, the stock's upward trajectory and current levels have made it an expensive proposition. Verizon may not be able to sustain its recent growth trajectory, particularly without Yahoo. The company faces fierce competition from other mobile service providers, including Sprint and T-Mobile. For short- and mid-range profits, it is a gamble.
Here are three important things you should consider as Verizon peaks:
1. A Sluggish Growth Curve
Once a stock reaches multi-year highs, investors become unsure of its value. The only thing that can carry the stock forward from this point is growth.
Similar to other, major telecom companies, Verizon's shares are less than 3% away from multiyear highs.
Yet the current analysts' consensus is "hold."
That's because Verizon growthisn't inspiring. For the next five years, Verizon is projected to deliver just 3.18% earnings per share (EPS) growth year over year, which is lower than the industry's 6.3% run-rate.
Rival Sprint, which is backed by SoftBank, is expected to deliver 5% EPS growth year over year for the same five years.
2. The Ability to Keep Valuations at Peak
It will be difficult for Verizon to justify its current valuations of 6.8 times EV/EBITDA.
AT&T, with a much faster earnings growth prospect, deservedly gets a 7.7 times EV/EBITDA multiple. Shares of T-Mobile, with an expected 33.54% earnings growth outlook, are trading at 7.5 times EV/EBITDA.
Without Yahoo, Verizon may have difficulty competing for mobile device audiences. That is an increasingly key business. Yet Go90, Verizon's free mobile-video service for teens, hasn't been a hit. Yahoo's vast content could potentially help Verizon draw a larger number of subscribers.
By buying Yahoo, Verizon would also give it wider exposure to the mobile advertising space dominated by Facebook and Alphabet-owned Google. Yahoo has millions of users, online properties, and ad technology.
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These things could bolster AOL. However, buying Verizon shares based on a Yahoo takeover is a high-risk bet, even if Verizon becomes the eventual owner. Simply put, there are too many unknowns.
3. Intense Market Competition
Competition in the telecom business is strong. While the company's revenue from new streams such as the Internet of Things is inspiring, telecom remains its core business. In that light, the recent purchase of Telogis will likely pay off long term.
Telogis makes cloud-based solutions for mobile workforces, and specifically telematics. It also markets navigation software used by the likes of Ford, General Motors, Apple and even AT&T.
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While Verizon's strong balance sheet, heady dividends, and thumbs-up from Warren Buffett's Berkshire Hathaway are attractive, there are concerns. Verizon is a good stock long term, but if you're looking for faster gains or a surer thing, invest elsewhere.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.