Verizon: 5G Technology Is Worth Tens Of Billions

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About: Verizon Communications (VZ)
by: Olsny Freitas
Summary

Verizon is the first to launch a commercial 5G product in limited areas.

While Verizon is the first, nationwide 5G is likely only to be available in 2020.

By 2020, all competitors will have launched their own products, so Verizon's first-mover advantage is negligible.

Even still, the new 5G technology introduces two new revenue streams which are potentially worth tens of billions of dollars in revenue.

Thesis

Verizon's (VZ) 5G has the potential to add tens of billions in revenue to the company. However, competition is intense, and investors shouldn't lick their fingers just yet.

Introduction

Verizon's 5G launch has been mentioned a lot, but what exactly is it and how will it eventually benefit shareholders? First, a brief background. As one might probably suspect, 5G is an improvement upon 4G. Verizon is the first company to launch a commercial 5G product. Some key traits of 5G: 1) It allows for residential broadband, 2) 28 gigahertz, and 3) up to a thousand times faster than 4G. On October 1st, Verizon turned on 5G home broadband in four cities. The reason for only turning it on in four cities was due to lack of equipment essentially, according to CFO Matthew Ellis:

So the amount of equipment that we have on the proprietary standard is fairly limited, whether that be the network equipment or the customer premise equipment. So that's why it's limited to those four markets and specific geographies within those four markets.

New revenue streams

The new 5G technology is so much more superior than 4G that it can support multiple revenue streams. First, the company can now compete in broadband offerings as its product, 5G home broadband, is essentially broadband without the cable. Of course, 5G is also much faster. Furthermore, the company has plans to offer the product to 30 million households:

On the residential broadband, we've said we see the size of it and it's really based off where you see the density of homes. And so we certainly still see line of sight to getting to 30 million households in the U.S. with that product over the next few years.

Broadband plans go for about $60 per month in the US, according to this website. According to Telecompetitor, the median price for broadband in the US was $80 per month. In any case, if Verizon manages to execute at an average price of $60 per month times 30 million households, it could rake in an extra $21.6 billion in revenue per year, which constitutes a 16% increase from current revenue levels.

While it may first seem intuitive to assume no pricing power decrease, it is actually a quite optimistic assumption. One would think that if 5G is far superior than current broadband offerings, which it is, it could at least sell it for the same price. The problem is that Verizon's biggest competition is not going to be legacy broadband, but other telecom providers offering 5G broadband. So while a $21.6 billion revenue increase looks great, it would be wise to temper expectations. Nonetheless, since Verizon barely competes in this area, it will stand to gain at least some revenue. Management is especially excited about the second new revenue stream:

This is a piece that's - where 5G is really going to be different from some of the other technology changes. Most of the prior generational changes in wireless technology have been about improving the consumer experience. And certainly, 5G will improve the consumer experience too, but the B2B side is going to be far greater as you go into 5G than it is in previous generations. Because of the massive throughput, because of the low latency and a whole host of the other improvements with 5G, we think, over time, the B2B adoption of applications and technologies using 5G in ways that fundamentally changes how their business is run is a significant upside as well.

In terms of B2B, you can think augmented reality, telemedicine, and even self-driving cars. All in all, with two new potential revenue streams, there seems to be a significant upside in the 5G technology.

Competition

While Verizon is the first to launch a broadband 5G product, there's still plenty of competition. AT&T (NYSE:T) is promising 5G as a mobile service by the end of this year (so basically by next month). T-Mobile (NASDAQ:TMUS) also claims to deploy mobile 5G this year with the only caveat being consumers won't be able to use it until the 5G-capable smartphones come out. Not surprisingly, these smartphones are set to come out next year. So, T-Mobile isn't really competing as much as just trying to stay in the discussion. Next, we have Sprint (NYSE:S) (which is set to merge with T-Mobile).

Sprint claims it is, together with LG, building the first 5G smartphone. The reality is, however, that nationwide 5G, whether that be a 5G smartphone, 5G mobile or 5G broadband version, will only be available in 2020. So while these carriers are "out claiming" their revivals, it amounts to a PR stunt. It looks to me that all the major carriers will launch their 5G products very close to each other with the full suite of products being launched in 2020. It's going to be very interesting to see who comes out on top.

Conclusion

Yes, Verizon is the first to launch a commercial 5G product, but the benefits from a competitive standpoint seem negligible. The best thing about 5G is that it is opening up two potentially large revenue streams. On the B2B side, it can be valuable to multiple different industries. In its own industry, it can now compete in broadband, something it has not done to any significant amount.

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.