Walter Piecyk (NYSE: VZ) of BTIG Research downgraded Verizon from buy to neutral, opining in a research note that the nation's largest wireless carrier is unlikely to dramatically grow its revenues anytime soon.
Piecyk described Verizon as "the strongest wireless operator in the United States," noting its low churn, high margins and continued subscriber growth despite the maturity of the market and the recent momentum of T-Mobile (NYSE:TMUS). And competition in the U.S. wireless market is "the tamest we have seen in quite some time," he added.
"Despite all these positive dynamics in wireless, which represents over 80 percent of Verizon's EBITDA, its stock has done little over the past 2-3 years and it is increasingly difficult to see how our outlook for the company could improve further to deliver upside to existing investor expectations," Piecyk explained. "In fact, our EPS estimates, to the extent this is a meaningful metric anymore, are now below consensus."
Piecyk acknowledged Verizon's ambitious initiatives such as Go90 and FiOS Custom TV, but said such offerings are unlikely "to move the needle." Meanwhile, he noted, the wireless business "is being managed exactly as you would expect the dominant operator to behave in a non-competitive, mature market." He also expressed concerns about Verizon's small-cell network densification strategy as well as its apparent plans to use higher-band spectrum (likely above 10 GHz) that it doesn't yet own and which might not be optimal for cellular communications.
Piecyk's observations underscore the increasing dichotomy of the U.S. wireless market. Verizon and AT&T (NYSE: T) have cemented their status as dominant players that compete largely on nationwide coverage and focus on high-end users, while T-Mobile and Sprint (NYSE: S) continue to target new customers with discounted phones and services.
"Verizon and AT&T now appear willing to cede market share rather than further re-rate their post-paid subscriber bases, an unsurprising move by dominant operators," Piecyk wrote. "As a result, churn for all four carriers are at historic lows and Verizon's EBITDA margins are, by any definition, at record high levels."
Additionally, Verizon is likely "to face structural headwinds to its ARPU over the next two years" as it transitions away from handset subsidies and two-year contracts to phone payment plans and the lower-cost service plans that accompany them, according to Piecyk.
- see this BTIG research note
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