Verizon: Deserving Its Short-Term Rally

Jun.22.12 | About: Verizon Communications (VZ)

Verizon (NYSE:VZ) is on an upward trajectory in the stock market, so many of its investors may be feeling very confident at the moment. Verizon is not without threats and competition though, and these must be kept in mind. In no way is Verizon a perfectly safe bet, but Verizon seems to be poised for growth. I expect it to continue to roll out new plans and products with a higher reliance on data packages in the near future. The company should continue to grow, and this should have good effects on the stock.

Verizon started the drift towards data packages last year. Changes in these plans have eventually led to its recent announcement of shared data plans. Under this plan, a customer would pay $90 per month to get unlimited voice minutes and text messaging, as well as 1 GB of data for one smartphone. This plan targets people who are not already big users of data plans. It may also drive demand from families, possibly where only one person has the need or desire for a smartphone. The 1 GB data limit is fairly low, but for people who only use the data plans for personal entertainment, this might be enough. It should be noted that this plan is responding to the demand for data packages, as there is little increase in demand for voice minutes or text messaging anymore.

Due to the increase in demand for data packages, Verizon is improving the capacity of its networks. Later this year, it will roll out a new platform that will allow for a capacity of 8 terabits per second. Deploying a faster network will not only increase speeds, but it will also increase scale and processing power while decreasing power consumption overall. An 8 terabit network places Verizon well in front of the competition, and it is an essential step in maintaining its dominant status in the industry.

There will also be an expansion of its core service through the increasing connectivity in all devices, including automobiles. Verizon is partnering with Toyota (NYSE:TM), Honda (NYSE:HMC), and others to further the use of 4G features in these vehicles. The expansion into servicing the automobile industry is an attempt to find new sources of revenue. With the cell phone market growing weakly, Verizon will need to find new sources of revenue to continue to grow at all. Since it has a more robust LTE network than any competitors, Verizon is the company best poised to take advantage of this opportunity.

In a move that will speed this expansion, Verizon is set to acquire Hughes Telematics. This acquisition should increase any presence Verizon already has in the automobile industry. Additionally, this move will increase its presence in enterprise solutions, putting it far ahead of its competition. Hughes is currently a leader in the connected services market that is expected to drive business solutions. This acquisition will make Verizon's portfolio more robust. The need to find other sources of revenue is high, so being the first mover into these markets will be a huge boon for Verizon. Expect its competitors to follow its lead as best as they can.

Its stiffest competition, AT&T (NYSE:T), is following its lead pretty closely. Specifically, AT&T is expanding its network into business solutions. Just recently, it announced that it would develop a global network to cover Nutreco, a company specializing in animal and fish feed. This network will cover over 10,000 employees in 30 countries, and it is intended to improve efficiencies and productivity at Nutreco. AT&T sees this as an overall trend, as it is expecting to develop more network solutions specifically for businesses by accommodating the growing use of smartphones and tablet computers. AT&T stock will likely be on the rise as a result of these actions.

Sprint Nextel (NYSE:S) is another competitor looking for new ways to leverage technology for growth. In the very near future, it intends to create and launch its own NFC wallet, which will be similar to the one Google (NASDAQ:GOOG) already has. It still intends to grow by expanding its network though. It just began its multiyear network initiative to improve voice, network speed, and flexibility while reducing operating cost. In a nutshell, Sprint wants to upgrade its networks, but moves to upgrade networks are unlikely to give one company a distinct advantage over another. Sprint will remain a strong competitor, but I do not think the stock will change much as a result of these events. The stock will likely see only small increases.

On the device side, Verizon will see competition from many others. T-Mobile seems to be one specific competitor it should be watching. It could significantly impact Verizon's business if people begin purchasing phones without a contract, as T-Mobile is lowering prices on no-contract data plans. I do not expect this to drastically impact Verizon's bottom line, but crazier things have certainly happened.

Small carriers have been growing quickly as well, and they pose another form of competition to keep Verizon on its toes. Since the end of March, TW Telecom (NASDAQ:TWTC) has grown at a faster pace than Verizon. Again, I would not be too concerned about this if you hold Verizon stock, but it will be a development to keep an eye on.

Verizon has been a huge part of the growth in the industry lately, but it will face some steep hurdles in the near future as it seeks new sources of revenue. I expect the company to continue to push its core services as far as it can, and this means squeezing every drop out of data plans. This will probably happen quite rapidly as well. Due to its place in a high performing market, Verizon should bring good returns in the near future. If you are going to invest long-term, however, I would watch and see how it plans to increase revenue growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.