Bill Comes Due at Verizon

Verizon ( VZ) is set to answer the critics who charge that the telco has turned its back on shareholders.

The New York phone giant is due to report third-quarter earnings Thursday morning. Wall Street is eager to see the fine point Verizon will put on three key trends.

Investors already know this much: Verizon's network spending is headed way up, while its core phone business is steadily slipping. Fortunately, the biggest encouragement for investors is that its wireless unit is building like a tropical storm.

It has been a rough year for Verizon, its shares having hit a three-year low last week after dropping 11% since the end of September. But the value crowd warmed to the company this week after a Barron's article argued that bears had overstayed their welcome. The stock rose 18 cents to $30.27 Tuesday.

Now Verizon is under the gun to deliver.

Analysts are looking for Verizon to post net income of 64 cents a share on $18.9 billion in revenue, according to Reuters Research.

Fans say if wireless subscriber growth is as stupendous as some predict -- that means north of last quarter's record high 1.9 million net new users -- then the company should have luck keeping people's focus off the ugly parts of the business.

But if wireless growth shows signs of slowing or if the average revenue per user falls, the scrutiny will return to the strategy and the wisdom behind some risky investments.

The No. 1 telco is making a bold bet that a transfusion of fiber optics can remake the company into an advanced digital services provider offering the triple play of TV, Internet and calling. Meanwhile, the company is rewiring its wireless network with evolution data-only, or EV-DO, gear that can deliver fast Net access to cell phones.

The two-pronged expansion is costly, and analysts and investors say they are concerned that Verizon's spending increases have been rapidly outpacing sales growth. Revenue for 2005 is expected to grow about 3.5% over last year. Meanwhile, with the new budget forecast, capital spending will grow by 15% over 2004.

Verizon is in a delicate spot and investors aren't exactly in the mood to be patient.

"In our view, the increased investment is clearly a smart long-term strategy," writes CIBC analyst Tim Horan in a research note. But, says Horan, who gives Verizon a neutral rating, "over the next 12 months the declining free cash flow coupled with accelerating line losses will keep a cap on Verizon's stock price."

Some investors say they can't afford to wait it out.

"I think the stock is cheap," says one hedge fund manager, "but I had to sell at $32."

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