Verizon: What Now?

| About: Verizon Communications (VZ)

Summary

Verizon stumbled during Q2 in large part due to the union strike. .

The company has great plans for mobile media, yet the size of the wireless revenues reduces any potential impact from that initiative. .

The stock is stuck as a yield play similar to the utilities. .

The Q2 results for Verizon Communications (NYSE:VZ) were very unspectacular. The wireless giant took a hit from the strike and the results show how close the company was to a big financial impact and possible damage to the Verizon Wireless brand.

The biggest concern with the results is that the company possibly reached for Yahoo (NASDAQ:YHOO) due to the inability to generate growth in the saturated domestic wireless market. The stock yawned after the release suggesting possibly the rally has gone too far.

Though Verizon beat analyst EPS estimates by $0.02, the company reported a YoY decline in part due to an estimated $0.07 hit from the seven-week work stoppage. As well, the company is still feeling the pricing pressure from the domestic wireless pricing war as both Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) signed up more postpaid phone customers.

Verizon saw the work stoppage cause net declines of 13,000 Fios internet connections and 41,000 Fios video connections. The deal averted some of the worse-case scenarios, but the wireless giant isn't in a better position from going through the experience. The retail postpaid net adds were weaker than in the prior periods.

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Source: Verizon Q216 presentation

The best Verizon can project is achieving 2017 growth rates similar to the GDP growth. With revenues declining in Q2, this growth rate is probably only attainable by generating some solid growth in the mobile-media division.

The Yahoo purchase for $4.8 billion gives Verizon more scale in the mobile-media sector, but the company has to take on Alphabet (NASDAQ:GOOG) and Facebook (NASDAQ:FB) that neither Yahoo or AOL had any success against. In essence, Verizon is bringing a knife to a gun fight.

Verizon remains in a solid position and nothing changes from my previous reserach suggesting the company is now a utility play. The Q2 results and Yahoo purchase cement the view that the only growth opportunity is a one in a hundred chance that two wrongs make a right.

Verizon has $127 billion in annual revenues. According to a letter from Yahoo CEO Marissa Mayer (via Forbes), the new company has a goal of reaching $20 billion in annual revenues in 2020 from the mobile-media segment. Is this a realistic goal?

Yahoo has $5 billion in annual revenues so the target is unclear on how the amount relates to total revenues considering the non-mobile revenues and exiting AOL revenue. Even if one assumes some $15 billion in growth, the additional revenues over over a four-year period on a revenue base now at $132 billion won't move the needle much.

Even worse, Yahoo is showing a horrible trend where revenue after traffic acquisition costs continues to plunge. Possibly the 113 million wireless connections from Verizon will help with acquiring customers.

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Source: Yahoo Q216 presentation

In order to really move the needle, the wireless division will have to generate revenue growth from a move to 5G to where the mobile-media segment is add on growth.

The key investor takeaway is that Verizon is an interesting stock offering a 4% dividend yield. The stock though offers little opportunity for growth as even great success from the mobile media initiative is still over shadowed by wireless services revenues.

Disclosure: I/we 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.

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