Things are finally starting to look up for Verizon, at least according to some Wall Street analysts. Specifically, the analysts at Deutsche Bank Research forecast that in the second quarter the nation’s largest wireless network operator will record its first increase in wireless service revenues since 2014.
“Wireless fundamentals are meaningfully improving, following a heightened wave of aggressive competitive activity in recent years,” the Deutsche Bank analysts wrote in a research note issued this morning. “From a high level, industry pricing has stabilized, competitive intensity has moderated (churn is near all-time lows for VZ/T/TMUS), and the industry’s two biggest disruptors (TMUS/S) have announced plans to merge. We expect Verizon’s 2Q18 results to reflect a return to (normalized) service revenue growth (yoy), for the first time since late 2014, as well as continued margin improvement. These are all meaningful for Verizon, the industry’s largest player deriving nearly 90% of EBITDA from Wireless.”
The firm said that Verizon is benefiting from several key trends in the wireless industry, most notably the relaxation of the sector’s intense competition that has dragged down revenues for the past few years. “Pricing and competitive intensity have both stabilized, following more turbulent periods in 2016/2017,” they wrote. “The industry has now uniformly shifted to unlimited plans (initiated Feb. 2017), with negative re-pricing effects in the rear view mirror. At the same time, new handset launches (ie: iPhone 8/X) have failed to trigger much in the way of (sustained) aggressive promotions, keeping industry switching activity relatively muted.”
Apart from that, the Deutsche Bank analysts also wrote that Verizon is gain from two other key developments: the proposed merger of T-Mobile and Sprint and the rise of the cable MVNOs. In the first item, the analysts noted that T-Mobile and Sprint are the industry’s two biggest disruptors, and a combination of the two could reduce the overall sector’s competitive pace. And as for the second item, the analysts noted that both Comcast and Charter either are using or planning to use Verizon’s network for their respective mobile service offerings, which therefore will help bolster revenues in Verizon’s wholesale business unit.
Finally, the analysts noted that Verizon may be able to cash in on two other opportunities: digital advertising (through its new Oath division) and 5G. “For now, we think Verizon has a leg up on peers in the ‘5G arms race’, given: (1) its millimeter wave (mmWave) spectrum position, holding 76% of 28GHz and 46% of 39GHz spectrum in the top 50 US markets (per TMUS regulatory filings), and (2) Verizon’s ongoing multi-year investments in small cells, LTE network densification, and recent fiber builds (with the ability to leverage these investments across several use cases like LTE, 5G, Enterprise, etc.),” the analysts noted.
The sunny outlook on Verizon by the Deutsche Bank analysts mirrors a similar report from J.P. Morgan. As noted by MarketWatch, J.P. Morgan analysts prefer Verizon stock over AT&T’s because Verizon has "a slightly higher multiple but less video-related margin pressure."
Verizon management has already hinted that the carrier may soon return to growth in wireless service revenues. “Service revenue performance produced solid results in the quarter driven by customer step ups to higher access plans. The quality of our overall customer experience and value proposition, as well as our measured approach to promotional activity in a highly competitive environment,” boasted Verizon CFO Matt Ellis during the carrier’s quarterly conference call with analysts in April to discuss the operator’s first quarter results, according to a Seeking Alpha transcript of the event. “We expect the momentum in the service revenue trajectory to continue and we are on track for growth to turn positive on a reported basis around the end of the year.”
Ellis added that the carrier’s improving wireless service revenue trends were “predominately” due to the carrier’s postpaid business.