Verizon (VZ) has deployed its gigabit Ethernet technology to the routers of its private IP network. The initiative is designed to improve the revenues of the company's strategic services sector. In this article, I want to show how the rising IP traffic and the exploding Ethernet market will enable Verizon to increase the revenues of its strategic services sector by a 5% margin. This factor will help Verizon to improve the fundamentals of its global enterprise division.
Why will Verizon's fundamentals show an improvement? The global IP traffic is driving the expansion of the Ethernet market. According to Cisco, the global IP traffic will increase sixfold over the next five years. The global enterprises sector will turn to a network powered by an Ethernet technology to cope with the situation. Dell'Oro Group, a market researcher, said the Ethernet switch market is likely to reach almost $25 billion in 2017 as a result of the enterprise patronage. Verizon will benefit from the expansion of the market by deploying an Ethernet technology to its routers. This will increase the revenues of its strategic services sector.
The growth of the Verizon strategic services sector is inevitable. The sector has been showing an improvement in its revenues. In the first quarter, its revenues increased by 6.0% compared with the sales recorded in the first quarter of 2012. This represented 55.6% of the total enterprise revenues. In the fourth quarter, the sector increased its revenues by 5.3% compared with the same period in the prior year. This represented 54% of the Verizon global enterprise revenues.
Verizon's Strategic Services
Verizon has strengthened the strategic services sector with a number of initiatives. It completed agreements with some enterprises to provide them with an advanced business technology solution. Verizon introduced a cloud and a data center infrastructure to assist the health care industry. Verizon has also deployed the next-generation 100G technology to several networks in the US and Europe.
The latest deployment of the gigabit Ethernet technology will also expand the video and the e-commerce platforms of its enterprise customers. "The increase in demand for cloud and data center connectivity is driving the decision to expand our service offerings to a higher speed in order to meet the bandwidth needs of our customers by providing reliable, higher-performance, and secure technology," said Ihab Tarazi, vice president of Verizon's Product and Technology.
Verizon is embarking on the deployment to give its enterprise customers the needed connectivity to conduct their operations effectively. Additionally, Verizon wants to use the opportunity to increase its global enterprise revenues. Fortunately, the strategic services sector is driving its sales. Verizon needs to strengthen it so the company can have a head start over its rivals.
When we take a look at the financial reports of the company, we notice that the strategic services sector showed a year-on-year improvement. So it can be said that it is making progress.
With a price to sales ratio of 1.22, Verizon is trading competitively, especially given that it has a gross margin of 62.84%. The gigabit Ethernet deployment will increase the revenues of the strategic services sector, improve the margins of the global enterprise division, and ensure a Verizon wireline revenue growth.
With a price to sales of 1.22, compared with 1.52 for AT&T (NYSE:T) and 0.63 for Sprint (NYSE:S), and a gross margin of 62.84%, compared with 59.96% for AT&T and 43.90% for Sprint, Verizon is operating competitively. AT&T has embarked on a $14-billion investment plan to enhance its wireline and wireless IP network. Sprint is constantly improving its IP network. Verizon's new initiative will enable the company to compete with its rivals.
There are some risks in buying Verizon stock. The share price of the company has appreciated by over 25% in the past six months. At $50.53, the stock is trading near its 52-week high. At the current price level, many investors may be skeptical about the stock. However, based on the performance of the strategic services sector and the growth prospects in the Ethernet market, we can say the Verizon initiative will improve the revenues of its global enterprise division. Looking at Verizon's price multiples in relation to AT&T and Sprint, we can say Verizon is a good buy for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.