Verizon: Black Swan Risk
Jun. 04, 2023 8:00 AM
Summary
Verizon continues to face the threat of a tech giant entering the domestic wireless space.
The wireless giant has seen their net debt level swell to over $150 billion just as another competitive 5G wireless network hits the market.
The stock will struggle to produce solid returns with the increasing competitive threats despite a large 7.6% dividend yield.
The biggest risk to the Verizon Communications (NYSE:VZ) investment story has always been the entry of a tech giant into the wireless space. The wireless giant already faces an overly competitive market with 3 5G networks and the entry of another network partnered with a tech company like Amazon (AMZN) would be highly troubling. My investment thesis remains Neutral on the stock with the rumored entry of Amazon into the domestic wireless services space offsetting any benefits of the large 7.6% dividend yield.
Amazon Threat
For years now, the market has rumored that Amazon will start offering wireless services as part of a package to Prime members. The online retail giant has long been linked to working with DISH Network (DISH) on their 5G network.
As with any business Amazon enters, the company offers the service for marginal prices in order to attract users to the e-commerce site to purchase other goods. The Bloomberg report suggests Amazon might only charge a nominal cost of $10 a month, but the company hasn't apparently held any successful negotiations with a US carrier like Verizon, T-Mobile (TMUS) or DISH.
Any such entry into the wireless space could turn into a black swan event for Verizon. While such an event is usually unexpected and Amazon selling wireless services wouldn't be a major shock, the stock doesn't trade like such an outcome is probable.
An Amazon spokesperson didn't appear to really shoot down the concept of a cheap wireless plan for Prime members with this statement to the media:
We are always exploring adding even more benefits for Prime members, but don’t have plans to add wireless at this time.
The problem facing Verizon is that too much spectrum exists outside the major wireless networks. Amazon can either utilize one of the major 5G networks or work with DISH to launch their 5G network and draw customers away from Verizon and AT&T. Verizon has the most mmWave spectrum needed from the fastest wireless service, but DISH and U.S. Cellular combine to nearly match Verizon.
DISH has until June 2025 to meet 5G network buildout requirements of covering 75% of each of its spectrum license areas with 5G. As part of the agreement with the DoJ due to the deal with T-Mobile, the company has until this month to cover 70% of the US population with its 5G network.
The satellite service is struggling mightily and wants to push out network spending due to the additional costs of $2 to $3 billion to meet the 2025 network buildout requirements. Amazon floating a potential deal with the other wireless providers might be a negotiating tactic for garnering a more favorable deal with DISH.
Either way, DISH has a 5G network heading towards coverage of 70% of the US population and it's already contributing to the weakness at Version. The company has 7.9 million retail wireless subscribers, but the business is struggling having lost 81K during Q1'23 alone.
Hidden Weakness
The big problem facing Verizon is that the wireless giant has struggled to grow revenues and profits without the aggressive entry of a tech giant. DISH has the 5G network effectively built out, but the company could really use a larger backer like Amazon to fully build out the 5G spectrum and actually compete.
Verizon offers a 7.6% dividend now with the stock dip, but the company reported Q1 sales fell 2% and EPS was down $0.15 from last Q1. The company has had to aggressively spend on their own 5G network to just remain competitive with T-Mobile.
The worse possible outcome is another competitive 5G network, or a competitor offering cheap wholesale wireless services to the like of Amazon. Either outcome appears very likely now.
Even without these general threats, Verizon was already forecast for flat EPS over the next 3 years. Analysts have already cut EPS estimates for 2024 from an original estimate back in mid-2022 up at $5.85 to only $4.72 now.
The risk is that one of these threats pay off and those estimates fall even further while Verizon has a massive debt load. The wireless giant ended March with a net debt balance of $151 billion, which isn't large for their current cash flows. The problem is that Verizon hasn't prepared for a scenario where cash flows slip due to the entry of Amazon or another tech giant with a much better balance sheet into the wireless space
Takeaway
The key investor takeaway is that Verizon still isn't prepared for a black swan event where the company loaded up on debt to build the 5G network and a large competitor like Amazon enters the wireless space with cheap services. Investors should expect meager returns despite the large dividend payout.