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iPhone upgrade cycle could lead to surge in device sales

iPhone upgrade cycle could lead to surge in device sales


In a world of high valuations and slim shareholder yields, Verizon Communications (NYSE:VZ) shines with its 6.7% dividend yield. The company's wireless equipment revenue could surge soon if consumers decide to upgrade their iPhones. With capital spending expected to plummet after 2024, the stock could continue to recover. That's why I'm bullish on Verizon.

No one on Wall Street seems to like telecom stocks, but if you're bullish on AI, large-scale language models, the metaverse, and cloud computing, why not be bullish on America's reliance on connectivity and the pricing power of Verizon?

Verizon's Strong Competitive Position

Verizon's competitive position supports the company's bottom line. So how does Verizon stack up against its competitors? Let's take a closer look.

To understand where Verizon is going, let's first look at how they got here. Coming into the 5G world, Verizon had the best network in the US. With high 4G penetration, the company won 31 consecutive JD Power awards for network quality. Verizon's reputation for quality means it's profitable to invest heavily in 5G, and because of that, it has secured very low interest rates in 2021.

Fast forward to the present, and Verizon is investing far more in its 5G network than its competitors. The company won its 32nd J.D. Power award (fewest network issues across all regions) and was recognized by Root Metrics as the most reliable 5G network. T-Mobile (NASDAQ:TMUS) touts its 5G coverage (53.79%), but this is often rural low-band 5G. Consumers may barely notice a difference between its low-band 5G and Verizon's primary 4G network (covering 70% of the US).

So is it enough to have the top 4G coverage and the best 5G reliability? Maybe not, but Verizon also has a competitive advantage in Ultra Wideband 5G and fixed wireless access. Verizon is rolling out Ultra Wideband in major cities, which will likely allow it to offer 5G speeds 10 times faster than other networks.

Finally, in my opinion, the company has a preeminent position in the fast-growing fixed wireless internet. Check out Verizon's fixed wireless access ad (in grey) below.

Source: Verizon Q1 2024 earnings call

Also note that Verizon's prepaid and postpaid phone net addition losses have narrowed year over year. Verizon has been raising prices, which likely has resulted in some of its lower margin or stingy customers leaving. But at the end of the day, it's revenue that matters, which translates to profitability.

The story continues

Potential for a surge in revenue

I believe Verizon's revenues are headed for an upswing. In the first quarter of 2024, Verizon's total wireless service revenues grew 3.2% year over year, supported by a strong competitive position. If Verizon's wireless equipment revenues (sales of smartphones, tablets and other devices, which were declining last year) begin to recover, Verizon could soon return to respectable revenue growth. I view Apple's announcement of exciting new AI features as a positive in this regard. If device sales recover, it could boost Verizon's revenues.


I believe Verizon is too cheap, with a forward P/E ratio of 8.9. This gives Verizon a forward earnings yield of 11.2%, comfortably above its forward dividend yield of 6.7%.

Verizon trades at a P/E ratio of 28 and compares favorably with the S&P 500 (SPX), which has a more cyclical earnings picture, and a dividend yield of just 1.31%.

Why Verizon is recession-proof

While Verizon's profitability may be affected by other factors, an economic downturn typically isn't one of them. Why? Internet connections and cell phone plans are essential for most consumers and businesses. They're among the last things people stop spending on when times get tough. Here's the evidence: Verizon's operating cash flow and operating profits grew during the Great Financial Crisis of 2008-2009 and the COVID-19 meltdown in 2020.

The collapse of capital investment

I think the investment case for Verizon is pretty simple. The company had to invest heavily in its 5G network, which hurt its balance sheet (manageably). This, along with rising interest rates, caused Verizon's stock price to plummet. But the industry as a whole is seeing its spending fall, and Verizon is starting to focus more on profitability. At such a low valuation, this should translate into solid shareholder returns. The price-to-earnings multiple could also rise as debt is paid down and interest rates fall.

I believe Verizon will report strong free cash flow as capital spending declines sharply from 2024 onward. Verizon said it “expects cash needs for its 2024 capital plan to be between $17 billion and $17.5 billion.” That's down from $23.1 billion in capital spending in 2022 and $18.8 billion in 2023. Additionally, dividends should be well covered and there's room left for debt reduction, which should boost book value and earnings per share.


Competition is Verizon's main risk. Will the industry continue to compete fiercely for customers? Will competitors try to outspend each other (ignoring profitability) to gain market share? I think these are hard questions to answer. But so far, so good. CTIA, American Tower (NYSE:AMT), and Wells Fargo (NYSE:WFC) expect industry capital spending to decline in 2024 and 2025.

Investors should also keep an eye on Verizon's interest coverage ratio (operating income divided by net interest expense), which is currently over 5x, making it quite high. Benjamin Graham, the famous investor who mentored Warren Buffett, recommends an interest coverage ratio of 4x or higher for stable companies.

Is VZ stock a buy according to analysts?

Currently, of the 13 analysts covering VZ, 6 have given it a buy rating, 7 have a hold, and 0 have given it a sell rating, making the consensus rating a moderate buy. The average price target for VZ is $44.62, suggesting an upside potential of 12.2%. Analyst price targets range from a low of $39 to a high of $52 per share.


I am bullish on Verizon and believe it is one of the best value stocks in the S&P 500. Industry-leading 5G reliability, 4G coverage, ultra-wideband speeds, and fixed wireless internet make Verizon a best-in-class operator. The company's equipment revenues are likely to recover soon, along with wireless services revenues. I view revenue growth and declining capex as bullish for Verizon, which trades at a P/E of 8.9.





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