Plan Changes May Backfire On Verizon Investors

Jun.25.12 | About: Verizon Communications (VZ)

by Matthew Smith

As far as telecom companies go, Verizon (NYSE:VZ) is certainly one of the giants. When looking at recent news, however, the stock does not appear overly impressive. While the company is not in a bad situation, I do expect great gains in the stock at the moment.

The company recently announced changes to its plans, which now have higher costs for data while customers will have unlimited voice minutes and texting. It also allows the data allotment to be used on multiple devices for the customer. Many believe that the changes will be beneficial to the company, so this is good news to the company and the investors.

While Verizon may be preferable to some of its competitors, I am not convinced that the company will have long-term profitability. Its data plan changes risk alienating many customers, and given the changing nature of communication and Internet data, I do not recommend getting too excited about Verizon at this time, even though it is currently surpassing its 52-week high. While an argument can be made for holding on to Verizon stock if you already have shares, I personally would not get involved with the stock at this time.

Verizon's data plan changes do not come as a shock. The company had undoubtedly seen a steep decline in usage of traditional voice minutes and text messages, and it realized that it needed to change its business model.

Financial analyst Steve Clement summed up these changes well in an interview with Reuters. "It looks like it's good for people who are real heavy voice and messaging users," Clement said. "For folks who don't care about voice and messaging, I don't think the plans are that good because they force you to pay a bit more for unlimited quantities of something you don't want."

From my observations, most people use smartphones overwhelmingly for data purposes, not for phone calls and texts. Obviously, texting is an important function as well, but the amount of time spent texting often pales in comparison to the time spent over data networks.

While I think that Verizon is correct to change its pricing, therefore, I am not sure this was the right way to do it. It may affect the company in the long-term by alienating some customers. Essentially, the plan rewards people who used unlimited plans for minutes and texts before and punishes those who bought cheaper plans without unlimited minutes. Regardless, it is rumored AT&T (NYSE:T) and Sprint Nextel (NYSE:S) will both follow in Verizon's footsteps with similar plans. As more carriers are expected to follow suit, this may have a limited impact on the stock when it comes to the bigger picture.

This is not the only way that Verizon has recently been upsetting customers though. The company recently refused to offer a deal on a Samsung phone because it did not want to participate for financial reasons. AT&T did the same thing, but this is still a worrying sign to some people. Regardless of what its competitors are or are not doing, there just does not seem to be much to get excited about with Verizon.

One smart move Verizon must get credit for is its decision to purchase Hughes Telematics, which manufactures wireless systems for vehicles. While it paid a hefty sum, the move will allow Verizon to expand its GPS technology and other wireless systems used by cars. The move was widely applauded by investors who thought it was a nice warning shot to companies like Sirius XM Radio (NASDAQ:SIRI) and General Motors (NYSE:GM), maker of OnStar. If Verizon gets its feet in the door of wireless technology for vehicles, it should do quite well.

While the move to acquire Hughes Telematics was a great one, I am still not sure that this is enough to warrant buying shares in Verizon. If I already owned the stock though, I would probably hold on to it. Even those with faith in Verizon stock admit that it might not be a good time for new investors to get involved, citing the fact that the company is looking to cut its workforce, among other things.

Furthermore, Forbes just ran a piece questioning the new data plan. This article asks why Verizon is taking the chance of ticking off too many of its customers. The author writes, "Verizon believes Sprint and T-Mobile are now so weak they offer no effective competition. Most consumers are so suspicious about their coverage and/or device ranges that Verizon does not need to worry about defections too much."

If this is correct, one could argue that Verizon is taking its position for granted, gambling that customers will just pay more and accept it. In my opinion, that does not seem to be a sustainable attitude to have as a company. Being complacent and not innovating is a recipe for disaster for almost any company, and it may be even worse for a tech company. To be fair, this article was quite critical of AT&T and Verizon's "duopoly," so it ought to be taken with a grain of salt. I do think the article raises a lot of good points, however, and I would not feel comfortable gambling on Verizon.

I think investors should be wary of phone stocks in general at the moment. The Internet has been a game changer with regard to communication, and the industry will only continue changing. While we could see Verizon do decently in the short-term, I am not sure that it will have the legs to succeed in the long-term. It is currently at its 52-week high, furthermore, so there seems to be little reason for new investors to get involved. Stay away from Verizon, and stay away from telecom companies in general for the near future.

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