In our pre-earnings piece on Verizon Communications Inc. (NYSE:VZ) in early July, we suggested that investors take advantage of the rise from the stock’s lows in May to reduce exposure and rotate out. We argued that its rebound was unsustainable since its value did not justify the company’s deteriorating underlying data. We also mentioned that the market has already de-rated VZ, so investors should be cautious about buying declines. As a result, VZ has underperformed the SPDR S&P 500 trust ETF (spy) substantially since our previous article. VZ recorded approximately 16% return, compared to the spy’s 7% increase. As a result, VZ missed out on the broad market bottom in July 2022, falling closer to its July 2017 lows last week.
Verizon’s Q2 earnings report also failed to instill confidence in the success of its 5g initiative. It faces competition from AT&T (t) while expanding its c-band spectrum against T-Mobile’s (NASDAQ:TMUS) leadership. As a result, even its recent price action failed to address its deteriorating underlying performance, as management revised its fy22 projection downward. At the same time, we await a more constructive bottoming process. We believe VZ’s values are more balanced after the recent underperformance. Its price behavior also shows that VZ may be approaching a multi-year low, even if we have not seen positive price activity. As a result, we advise investors who have been waiting to acquire exposure to be patient at the same time.
As a result, we change our rating on VZ from sell to hold.
Verizon’s Valuations Are More Well-Balanced After the Recent Collapse
As noted above, VZ’s recent decline has reduced its NTM pe multiples to two standard deviation zones below its 5y mean. However, we caution investors against depending on the aforesaid multiples to determine whether VZ is too cheap to ignore and justify a buy recommendation. Investors should note that the market has de-rated VZ from its highs in 2020/21. We discovered that VZ has routinely seen significant selling pressure in one standard zone below its five-year norm. As a result, we believe it confirms our judgment that the market altered its expectations of Verizon’s underlying performance in light of the company’s competitive issues, economic headwinds, and 5g leadership complexity.
Regardless, VZ’s NTM EBITDA multiples indicate that it has plummeted to levels that saw strong purchasing support in march 2020. It also found solid support in 2019, as vz approaches the one standard deviation zone below its five-year mean. As a result of the recent beating, we believe vz’s values are more balanced presently.
Verizon’s Underlying Metrics Should Improve Through FY23
Furthermore, according to consensus predictions (neutral), Verizon’s operating performance should improve through H2’22 and into FY23. As a result, investors should not anticipate a repetition of its poor q2 performance. Management also expressed optimism about future performance, stating, “our runway for mobility growth is reliant on growing our customer base into higher-value data plans, and we continue to make solid progress in the second quarter.” we also anticipate seeing considerable benefits from the [price] initiatives we’ve made in the second part of the year. That amounts to almost $1 billion in increased revenue in the second and the first half. [we] believe that the steps we are taking, have taken, and will continue to take will place us on a path to EBITDA growth as we move ahead here.
We believe macroeconomic problems have exacerbated competitive barriers affecting Verizon’s growth drivers. As a result, we think that unless Verizon regains 5g leadership over TMUS, it will continue to experience growth and profitability difficulties. CFRA research also included the following in a recent commentary.
In our opinion, VZ is now caught between a rock and a hard place. On the one hand, you have AT&T, which is aggressive with promotions. On the other, you have T-mobile, which has a significantly more robust 5g network. Regardless, Verizon is far from out of the game just yet. As CEO Hans Vestberg outlined, Verizon is establishing a competitive edge to meet its 5g growth drivers.
We completed the quarter with 135 million pops covered by c-band and are scheduled to reach at least 175 million pops by year’s end. We are witnessing the outstanding results that we anticipated. C-band users have increased 233% since the end of the first quarter, while millimeter wave traffic has increased 49% year to date. C-band accounts for more than a third of our wireless traffic on average when installed. Currently, 47% of our consumer base owns a 5g phone, which is expected to rise to over 60% by the end of the year.
T-edge mobile is “by no means insurmountable,” according to a recent Barron’s interview. It emphasized that “by the end of next year, it would likely have deployed this new [midband] spectrum and narrowed the coverage gap with T-mobile.”
As a result, we believe the firm is aggressively addressing its competitive difficulties and is well-positioned to bridge the gap.
Is VZ stock a buy, sell, or hold?
As noted above, VZ is approaching its short-term support ($43). Furthermore, it has already found strong support as VZ bottomed out in January 2016 and July 2017. As a result, we believe that if VZ sees substantial buying upside at its short-term support, it might stage a multi-year bottom in the near future. Otherwise, a further decline into its intermediate support cannot be ruled out, perhaps setting up a surrender move before the final bottom.
As a result, if we observe a bottoming process, we believe the price action will become more positive. With a more balanced valuation and stronger operating indicators in the future, we are ready to re-rate VZ.
As a result, we change our rating on VZ from sell to hold for the time being as we wait for it to bottom.
Featured Image: Megapixl @Rafaelhenriquepress
