After Earnings, Is Verizon Stock a Buy, a Sell, or Fairly Valued?

Verizon Communications VZ released its first-quarter earnings report on April 22. Here’s Morningstar’s take on Verizon’s earnings and stock.

Key Morningstar Metrics for Verizon Communications

• Fair Value Estimate: $53.00
• Morningstar Rating: ★★★★
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Verizon Communications’ Q1 Earnings

Verizon posted solid first-quarter financial results amid weak customer metrics. Wireless service revenue increased 2.7% compared with a year ago, despite the loss of 289,000 net postpaid wireless phone customers during the quarter. EBITDA increased 4%, the fastest pace in nearly four years.

Why it matters: Verizon provided the first look at the US wireless industry since the firm warned of increased competition earlier in the year. We don’t see much cause for concern yet. Verizon reiterated 2025 expectations, including 8.0 million-8.5 million postpaid phone additions across the industry.

• The pace of postpaid phone customer defections, or churn, reached a decade high at 0.95% per month versus 0.89% a year ago. Verizon claims the increase was contained to customer groups that saw price increases at the start of the year, where the impact was worse than expected.
• Postpaid phone gross adds were flat versus a year ago, but introducing a three-year price and phone upgrade guarantee has spurred growth in April. Verizon is confident in the profitability of these offers, but we remain concerned that slowing industry growth will tempt more generous offers.

The bottom line: Our fair value estimate remains $53 per share, and we think the shares are attractive. We also reiterate our narrow moat rating. While the near term might be bumpy, we expect US wireless competition will remain rational.

• Verizon increased revenue per residential postpaid wireless account by 3.6% year over year, a bit slower than last year (around 4.4%), but still solid in our view. We estimate that pricing and upselling to premium plans continue to drive about 80% of this growth.
• The prepaid business continues to decline but showed good improvement.

Between the lines: Verizon doesn’t expect tariffs to meaningfully impact its network plans. The firm also believes it can pass any phone tariffs on to customers, remaining disciplined with its offers. We expect AT&T T and T-Mobile TMUS to share similar thoughts.

Fair Value Estimate for Verizon Communications

With its 4-star rating, we believe Verizon stock is undervalued compared with our long-term fair value estimate of $53 per share. Our $53 fair value estimate equates to roughly 7.5 times our 2025 EBITDA forecast. Based on Verizon’s performance in 2024 and management’s forecast for 2025, our valuation also implies an 8% free cash flow yield.

We expect Verizon will gradually lose postpaid wireless market share over time as it prioritizes pricing stability rather than growth. Smaller rivals T-Mobile and AT&T have similar network resources and should be able to attract roughly the same number of customers each quarter as Verizon. This parity should naturally cause the firms’ market shares to slowly converge. With a rational competitive environment allowing for stable service pricing, we expect revenue per postpaid customer will grow steadily in the coming years.

Read more about Verizon Communications’ fair value estimate.

Economic Moat Rating

Verizon’s narrow moat rating stems from cost advantages in its wireless business and the industry’s efficient scale characteristics. Verizon has organized its business along customer lines, but we believe it is best understood along wireless and fixed-line dimensions. The wireless business produces nearly 75% of service revenue but contributes nearly all of Verizon’s profits. We estimate wireless returns on invested capital were about 16% prior to 2021. Heavy investment to acquire additional spectrum in the C-band auction and subsequent spending to put that spectrum to use, have pulled wireless returns on capital to the low-double digits by our estimate, still leaving Verizon ahead of its cost of capital.

Verizon, AT&T, and T-Mobile dominate the US wireless market, claiming more than 90% of retail postpaid phone customers. Providing solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. A larger customer base does require incremental investment in network capacity, but a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about Verizon Communications’ economic moat.

Financial Strength

Verizon took on more than $65 billion of incremental debt in 2014 to finance the purchase of Vodafone’s 45% stake in the Verizon Wireless joint venture. Following that transaction, net debt increased to $106 billion, or 2.5 times EBITDA, prompting downgrades from the major credit rating agencies.

At the time, management pledged to reduce leverage and reach its prebuyout credit rating (A- from the major rating agencies) within five years, which would have likely required net debt of less than 2.0 times EBITDA. Verizon failed to meet this commitment, with dividends, acquisitions, and spectrum purchases offsetting cash flow.

Read more about Verizon Communications’ financial strength.

Risk and Uncertainty

Our Medium Uncertainty Rating reflects the volatility we think Verizon investors face relative to our global coverage. Verizon primarily faces regulatory and technological uncertainties. Wireless and broadband services are often considered necessary for social inclusion in terms of employment and education. If Verizon’s services are deemed insufficient or overpriced, especially in response to weak competition, regulators or politicians could step in.

Regulators control wireless spectrum licensing, which creates opportunities to influence the wireless industry. A flood of new spectrum available could drive down prices, further easing entry into the wireless business. Or, as we suspect was the case in the C-band auction, the threat of entry could drive up the prices Verizon feels compelled to pay.

Read more about Verizon Communications’ risk and uncertainty.

VZ Bulls Say

• A focus on network strength over the past 15 years has put Verizon in an enviable position. Its wireless network provides the broadest coverage in the industry, and its reputation with customers is sterling.
• With the largest customer base in the US, Verizon Wireless is the most efficient carrier in the industry, delivering far better profitability than its rivals.
• Verizon is relentlessly pushing forward in its core business, expanding its fiber-optic network and deploying 5G wireless technology.

VZ Bears Say

• Wireless technology is dramatically lowering the cost to build and maintain a network. Rival carriers have rapidly deployed new spectrum and technology to add coverage and capacity. Verizon’s network leadership is a thing of the past.
• Verizon’s fixed-line business is a disaster, earning minimal profits and facing years of high costs necessary to support declining revenue.
• Verizon’s balance sheet isn’t the fortress it once was. Paying down debt will limit strategic flexibility and shareholder returns.

This article was compiled by Gautami Thombare.