When the news broke that Verizon (VZ) had by court order agreed to give the government access to metadata from its customer records, I immediately thought of how destructive that would probably be to the company's brand value. The stock was hardly harmed by the news, as other companies were rumored or said to have also opened their telephone records and/or servers to the NSA, the government's monitoring agency, at one time or another. However, I believe that the lack of a significant reaction by investors with regard to VZ was mistaken, because the impact of this event upon Verizon's customer list is yet to be seen, and I believe could be a substantial value destroyer to its equity value. So I would sell Verizon's shares here and avoid any such risk where it need not be borne, because up until now, one name has been most closely publicly tied to this issue, Verizon. Thus, Verizon's brand has been effectively tarnished to some degree. Verizon should seek the government's assistance to mitigate its specific damages, and demand that it mention publicly and clearly that other telecommunications firms (by name) have been or will be required to share data at any moment in time. This is the truth of the situation as it stands today, but the general understanding of that truth across a wide swath of America could be significantly skewed.
The Guardian broke the news that the NSA had by court order accessed Verizon's metadata customer records, and I would say effectively been spying on American citizens without their knowing it. Without arguing the politics of this issue, I think it's clear that this is a suspect action that should have at least been made widely understood to the American citizenry in a louder and faster way than it was. This program was indeed part of an effort begun in 2006, and one that has the support of a broad spectrum of Congressional members and oversight by a FISA court -- which is intended to protect American constitutional rights. However, judging by the reaction of the media and American citizens today, not enough about it is understood by the American populace. So, I think it's safe to say that a good number of Americans are not happy about it and that many Verizon customers might be reconsidering their service provider today, despite the apparent reach of the issue beyond Verizon.
Perhaps Verizon should have made this issue more public and not agreed to it without a good public fight, and in that way forced all of its peers to also bear this weight today, if they are not involved. Though it was restricted in that way due to the issue's secret status. Since it seems logical and probable that other telecommunications providers are involved, Verizon should make a major PR effort to clear its name or at least bring in the names of its peers into the judgment pool. Verizon is at the center of the spotlight because of the Guardian article that broke the news, and because it is the largest telecommunications company in America. I believe it could mitigate any brand damage I'm speaking of here if it can implicate its most important peers as well, including AT&T (T), Sprint Nextel (S), Comcast (CMCSA), Time Warner Cable (TWC) and the rest, in the same mess.
Since the news about the metadata sharing was made public, rumors rose about another secret government program said to be named PRISM, which many major media providers are saying today is more than rumor. Under such a supposed program, the NSA is alleged to have access to emails and other Internet data. However, major service providers in the field have denied any knowledge of any such program and any participation in such a program. Apple (AAPL) says it does not provide any government agency with direct access to its servers. Google (GOOG) says it does not have a back door for the government to access data. Microsoft (MSFT), Facebook (FB) and Yahoo (YHOO) have also all denied being a party to any such effort. Still, at least one name remains tied to what many Americans seem to be feeling is an infringement on their privacy, and that is Verizon.
The stock rose a half-point Friday and 3.4% on Thursday after falling 1.1% on Wednesday. As seen in the chart above, it currently trades near its 52-week high, as it has benefited from its competitive efforts and operating performance. In its latest report for the March quarter, it beat Wall Street's EPS expectations by roughly 3%. Earnings per share estimates for its full year 2013 and 2014 have seen recent increases.
Consensus EPS Estimate 2013
90 Days Ago
While valued at roughly 17.8X the analysts' consensus EPS estimate for 2013, the stock trades at a modest multiple of 1.15X the 15.4% growth expected in 2014. However, it trades at 1.7X the 10.5% growth expected by analysts over the next five years on average.
Whether the stock is overvalued or not does not matter at this point, because an impact to its subscriber base due to the data sharing news would probably change market expectations for the company's operations and affect both earnings estimates and valuation multiples. It would probably drive the shares lower in my view, and I see no reason to risk that by holding the stock. Long-term holders, of course, have tax considerations to consider, and the news is still filing out. If Verizon's peers are also implicated clearly, perhaps with the aid of a Verizon PR push, this issue would be effectively mitigated. Though even in that case, there could be market share loss by all major American firms, with companies like T-Mobile US (TMUS) and Virgin Media (VMED) benefiting, whether they have also been involved or not. In any event, for new stakeholders, or those willing to deal with tax implications; or for those interested in a potential short opportunity, I would sell the stock today. I see no reason to bear risk while this issue and its implications are still unraveling, and while VZ has thus far not been significantly discounted for it.