By now you have heard somewhere between a little to quite a lot about the internet of things. This represents (according to pundits) the next great shift in the ongoing technological revolution, that changes everything from how we communicate, to how we learn, to how we maintain our appliances. At some point, this technological phenomena may well take over our driving duties, resulting in decongestion of roads and improved safety in transportation. It will also result in better manufacturing processes, as everything from refrigerators to washing machines send use and mechanical malfunction data back (en mass) to producers, allowing for more efficient application of forward technologies.
For now it is an infant industry in an ill-defined niche; one that is very long on promise, but very short on forecastable data. Peering into the future of the internet of things is a bit like looking at a picture of a cloud-filled sky: without access to weather radar or temperature or winds, those clouds could bring rain, or thunderstorms, or snow, or they could merely bring shade.
What this has to do with Verizon
Verizon (NYSE:VZ) has seen the picture, and they have gone out and bought an umbrella and some snow pants. The much ballyhooed acquisition of AOL (last year) and Yahoo's core internet (this year) were clearly designed to bring Verizon a step closer to competing with Google and Facebook in the advertising wars. And while this does not fit neatly into the IoT spectrum, it has one feature in common: the entrepreneurial application of big data.
In particular, big data is driving targeted advertising in much the same way that it is driving the potential revolution in the era of connected devices. Data has become so cheap, and the collection and transmission of that data so readily possible, that we can now store information on nearly anything that is encountered in daily life. This flux of information then allows statisticians to generate mathematical models that provide a much more detailed and immediate birds-eye-view of...well, everything.
If you are wondering how the world is going to end, it looks an awful lot like IoT; it is Terminator meeting the sign of the beast. Everything about you bundled up into a package that allows advertisers to sell more efficiently to you, and every piece of equipment you own to tattle on how you use (or misuse) your devices. It will connect your home, predict your travel patterns, and become the way that you buy and sell. It is doomsday wrapped up in a nifty little package of convenience.
And it is almost certainly going be good for the economy.
Verizon, more than buying entry into targeted advertising and multimedia services, has more recently tipped their hand with the purchase of Telogis and Fleetmatics (NYSE:FLTX), two complimentary companies who specialize in IoT - with Telogis a provider of transportation (truck fleet) software, and Fleetmatics a cloud provider operating in the same field.
The very usefulness of such tracking and trend identifying services rolls hand in hand with the manipulation of big data into actionable business models. And it is, of course, a very different business than the traditional communications services that Verizon has built their empire on.
Big Data and Verizon
Verizon already has access to quite a bit of data: with over one hundred million mobile connections, every time that a client powers up their phone they are sending information about themselves to the company. Adding software to enhance that ability for businesses (directly in line with Telogis and Fleetmatics) can produce a nice synergy to the underlying (and currently much larger) cellular network business.
Yet even beyond this, combining the big data approach to tracking, cataloging, and manipulating data with Yahoo's billion person per month search engine (and other products) gives Verizon access to an incredibly vast array of data; the proper manipulation of this data is precisely what has made Google (NASDAQ:GOOGL) into the Fortune 5 short list.
Still, Yahoo is not Google, and it is unlikely that it ever will be. And Verizon's glance towards the future of IoT is something of a gamble on the long horizon. It will be years and years before IoT ever produces returns on a large scale, and in truth once it does produce those returns it will most likely do so in an extremely diverse manner.
As it is, growth into the IoT brings Verizon head to head with not only Google, but also Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and a whole litany of other providers who have offices full of specialists with a leg up on monetizing the burgeoning market. This puts Verizon at a disadvantage, while Verizon's control of a coast to coast cellular network (combined with inroads into cellular operations in population saturated India) allows Verizon to potentially access a niche that is unavailable to the technological mainstays of silicon valley.
And it should be mentioned that the two most recent acquisitions (Telogis and Fleetmatics) don't need to be home-runs in order to return reasonable longterm rewards to shareholders. The integration of Yahoo and AOL into the mainstay of Verizon's offerings remains a somewhat stickier proposal, but even if there aren't giant synergies between the cellular network product and the multimedia and search engine services, the access to gobs of data (in this day and age) very well may be worth the price of admission.
And while IoT forecaster Machina had lowered expectations for IoT forward revenue (from $1.6T to $1.3T in the mid 2020's) the reason for this decrease in revenue is largely due to the increasing capabilities that smart phones have brought to bear (fewer people, for instance, are willing to pony up a grand for an in-car navigation system, what with cell phones and Google maps). This, of course, points to an interesting condition: IoT may increasingly (as it already is) move into one device does-it-all cellular applications. The ability for Verizon to grow subscription services across their national cellular network could quite easily provide for future growth to ARPU and top-line revenue.
Verizon as a long term prospect
Verizon and AT&T (NYSE:T) hit the mature market ceiling in the cellular business at the same time, and both companies recognized it at the same time. And while AT&T has gone the more aristocratic route of shoring up and seeking to grow businesses in which they are already in (expanding cellular services into Mexico, and greatly broadening their entertainment division with DirecTV) Verizon has taken on a more potshard approach (expanding cellular agreements into India, but also leaping across horizontal business boundaries into online advertising and telematics).
The two different corporate responses are about as starkly contrasted as can be, and while Verizon has the advantage of standing at the edge of the new technological frontier, AT&T's footing is a little more sure. Still, with IoT forecast to produce the greatest forward growth rates in the technological and communications sector, you can see why Verizon management are eager to get their foot in the door.
With that said, there should still be room in anyone's portfolio for both companies over the long-term: they both offer a perpetually enticing return to shareholders in the form of dividend yield, and both businesses have core competency in an industry (communications) that will never fall out of favor (change over time certainly, but never disappear - or even diminish). That said, I will repeat my conclusion (in a recent article) for AT&T with Verizon: with the broad market making new highs amid languishing earnings, with Market Cap against GDP at 2000-era levels, with the VIX in the basement and nobody sure about the upcoming Presidential election, now is really not the time to buy. But when it comes time to buy again, be sure to have a healthy representation in the telecom industry, with AT&T and Verizon your most reliable bet.
Verizon is not on sale at the moment. Even if the historically high equities valuations across the market do not spook you a little bit, Verizon compared to peers is pretty much valued in-line. Forward price targets are only a hair above the current share prices, with general sentiment currently trending towards the belief that an equities correction is in order. There seems to be little threat (although it is not impossible) that valuations will march much higher in the interim.
In the end analysis, buy Verizon when you can. There is (I believe) a good probability (though not a certainty) that share price will diminish sometime in the next six months (possibly much sooner). And if you ever do find it on sale buy it and plan on holding it for a long time, all while watching to see how much synergy Verizon can grab out of their recent acquisitions.
Note: though the material herein has been produced through the effort of broad research, the perspective presented does not represent a total review of the business prospects of the discussed companies. Investors should do their due diligence before any investment activity. For reference, click on the link for access to my research material.
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.