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Verizon: New Prepaid Plans Not Expected to Impact Stock

The telecom's new prepaid phone strategy is not expected to have a significant impact on the stock.
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U.S. mobile service provider

Verizon

(VZ) - Get Verizon Communications Inc. Report

recently announced prepaid data plans for most of its smartphones and feature phones.

Verizon competes mainly with

AT&T

(T) - Get AT&T Inc. Report

and

Sprint Nextel

(S) - Get SentinelOne, Inc. Class A Report

in the U.S. telecom market.

Compared to standard postpaid mobile plans, prepaid plans cost consumers less up front and do not require a contract. However, Verizon will sell mobile phones associated with prepaid plans at a higher price than phones associated with a postpaid plan.

Overall, we don't expect Verizon's new prepaid plan strategy to have any significant impact on the company's stock. Our analysis follows below.

The U.S. prepaid cellular market has grown rapidly off a small base in recent years. In the fourth quarter of 2009, 65% of the 4.2 million net new U.S. mobile subscribers were prepaid customers, according to technology research firm IDC.

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We estimate that Verizon's prepaid customer base constituted around 1.9% of total U.S. cellular customers in 2009. We expect prepaid adoption among Verizon customers to increase going forward, reaching around 2.2% of the U.S. cellular market by the end of the Trefis forecast period.

This growth is priced into our current $34 price estimate for Verizon's stock. However, there could be an upside of 1% to our estimate if prepaid adoption growth exceeds our expectations, reaching around 3.7% by 2016.

You can drag the trend-line in the chart below to create your own prepaid customer growth forecast for Verizon and see how it impacts the company's stock price.

Verizon's average mobile phone price was around $220 as of 2009. As mobile phone prices drop worldwide, we expect Verizon's average phone price to decline slowly during our forecast period, reaching $196 by 2016.

However, Verizon prices mobile phones associated with prepaid plans significantly higher than phones associated with postpaid plans. For example, Verizon will sell the BlackBerry Curve for $215 with a prepaid plan, versus $20 for a postpaid plan, according to Verizon data cited in Computer World magazine. Similarly, the Motorola Droid X will sell for $395 with a prepaid contract versus $200 with a postpaid contract.

As of 2009, Verizon had around 5 million prepaid subscribers and 85 million retail postpaid subscribers. This means that Verizon's average phone prices aren't significantly impacted by charging higher prices for prepaid phones. There could be an upside of less than 1% to our Verizon estimate if the company's average phone price declines more slowly than we currently forecast, reaching $210 by 2016 instead of $196.

In the next interactive chart, you can drag the trend-line to create your own phone price forecast for Verizon and see how it impacts the company's stock.

You can see the complete $34 Trefis Price estimate for Verizon's stock

here

.

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