The telecom sector has shown an interesting trend since the start of the year - the stocks operating in the sector are showing signs of strength after a slow start to the year. Verizon (NYSE:VZ) has also been performing well over the last few weeks, and we believe the stock price will rise further on the back of solid growth in the fundamental metrics of the company. The company has been able to grow its customer base for some of the most lucrative and high-growth segments, which will result in enhanced profitability. Furthermore, despite the recent trend of price competition in the sector, the company has been able to grow its user base without the price cuts. We believe this factor will prove to be vital for Verizon in the short-medium term. We will try to explain how this growth will impact the business.
As we mentioned above, the companies operating in the sector have been in a fierce competition for the user base, and the price competition was starting to threaten the margins of the major telecom players - Verizon, AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) have been the major players in this competition. Verizon was previously falling behind as compared to the other two players. But now it looks like it is in a much better position, after McAdam reported that the company has added another $1.4 million postpaid subscribers in its Wireless segment. This number, on its own, might not show the growth the company has achieved. So, let us look into its subscriber base as of the first quarter of 2014.
In the first quarter, T-Mobile was taking the lead, with 1.3 million postpaid subscribers. AT&T followed, with 625,000 postpaid subscribers, and Verizon was falling behind, with only 539,000 postpaid subscribers. In fact, it lost quite a few subscribers if we compare the first quarter number to last year's 677,000 subscribers. As discussed in detail in our previous articles about AT&T, this was mainly due to the aggressive promotional practices and price cuts by T-Mobile -- AT&T also followed in order to keep up with the competition. Verizon, on the other hand, did not make any significant attempts to join this battle, which resulted in a decreased user base in the first quarter. However, things are looking different now.
Despite keeping its price, Verizon has managed to grow its postpaid subscribers into seven figures. As much as this development sounds good on its own, there is more to this situation. Due to the price cuts by AT&T and T-Mobile, their subscribers were growing, but their revenues were decreasing at the same time. Verizon kept its prices solid through this period. This means that all this growth will be directly contributing to its revenues without it being offset by decreased price. Verizon expects its revenues to increase at a growth rate of low-to-mid single digits, and this subscriber growth backs the company's guidance.
4G-LTE for Prepaid Customers
Small strategic changes sometimes make big differences - telecom customers are usually price-sensitive, and Verizon was taking a risk by not decreasing its package prices. However, at the same time, the confidence in the superior services was key in guiding the decision of the company. Verizon is making a small change in its offering and it will soon be offering 4G-LTE service to its prepaid customers, which it only used to offer to its postpaid connections. Prepaid customers generally measure less in terms of customer loyalty and tend to switch more. Particularly for Verizon, prepaid customers were not a very strong area, as they were still stuck with the slow CDMA connections. For this reason, it accounts for a small percentage in the company's overall wireless business in the U.S. As the company moves ahead with this plan, this segment of the company will likely account for a larger share in revenues.
Free Cash Flows to be Sustainable
Verizon was considering buying Dish Network (NASDAQ:DISH); however, the recent acquisition of Vodafone's (NASDAQ:VOD) share of Verizon Wireless totaling $130 billion has already had a big dent in the cash reserves of the company. Another acquisition might have been too much for the company, and the dividends would most certainly have been under threat. However, the company has recently announced that it has disregarded the idea of acquiring Dish Network. Verizon has not fallen short of investors' expectations for a long time now when it comes to dividends. However, history proves that large acquisitions often constrain companies to slash their dividends. With this decision, the company has eliminated that risk.
Verizon has achieved solid growth in its subscribers without getting into the price wars and harming its margins, which should further enhance the metrics of the company. Moreover, offering 4G-LTE services to its prepaid customers will grow that segment as well. So, we are looking at more subscriber growth in the coming quarters. Verizon is making the right decisions and is not being overwhelmed by the competition. As a result, the profitability of the company will be enhanced over the next few quarters. We believe continued growth in its business segments will allow the stock price to rise further by the end of the year.
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