Wells Fargo upgrades Verizon, citing service revenue improvement and fiber investments

Verizon fiber
Verizon's hefty fiber investments should cut costs in the long term, Wells Fargo said. (Verizon)

Wells Fargo bumped up its outlook for shares of Verizon, saying the nation’s largest carrier is likely to return to annual service growth by the third quarter of 2018.

Verizon posted $21.6 billion in total revenue in the third quarter, marking a 2.4% annual decline, and while service revenue declined 5.1%, that was an improvement from the 6.7% slide the company reported in the second quarter. Service revenue increased sequentially for the first time in 12 quarters.

In January, Verizon disappointed investors when it warned that wireless service revenue wouldn’t return to growth this year. But Wells Fargo upgraded the company to “outperform” from “market perform” on Sunday, noting Verizon’s hefty investment in fiber as it prepares for the 5G era.

“Verizon shares are down 16% (vs. a 12.3% move in the S&P) since mid-January,” analyst Jennifer Fritzsche wrote in a note to investors as she raised the target price from $48 to $50. “In our view, much of the bad news is behind the stock in terms of wireless service revenue declines. We expect to hear more sooner vs. later of the company’s fiber initiative and the math behind it. We believe the plan will lay out a convincing case for both revenue growth and cost containment. Finally we believe from a PE (price/earnings) and dividend yield basis the stock’s valuation is attractive.”

Indeed, Verizon has spent billions to grow its fiber assets ahead of 5G rollouts. In May, it agreed to spend $3.1 billion to acquire Straight Path, capping an aggressive bidding war with AT&T, and earlier this year it completed the $1.8 billion acquisition of XO Communications in a move that deepened its fiber density in 45 U.S. markets.

“We expect Verizon to add more color into its Fiber One deployment strategy in the near future, which we believe is underappreciated by the Street,” Fritzsche wrote. “While this could modestly move up its capex spend in the coming years, we think over time Verizon can reap significant cost savings through its fiber push through lower backhaul and access costs.”

Shares of Verizon were selling at $45.81 in premarket trading this morning, up nearly 1% from Friday’s closing price.