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Investment Overview for Verizon (NYSE:VZ)
Verizon makes money primarily through mobile phone subscription plans for consumers and businesses. The company also provides land line phone service to residences, small businesses and large enterprises. 4G wireless, wireline broadband Internet and fiber optic TV services (FiOS) are growth areas for Verizon.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Verizon's value that present opportunities for upside or downside to the current Trefis price estimate for Verizon.
Mobile Plans & Phones
U.S. Mobile Phones in Use: We estimate that this figure will increase from about 314 million at the end of 2015 to about 340 million by the end of our forecast period. However, there could be a downside of about 3% to our price estimate if this figure only reaches to 315 million by the end of our forecast period. On the other hand, there could be an upside of a similar order if the figure hits the 365 million mark by the end of our forecast period.
Verizon's Share of Monthly Mobile Subscribers: We estimate that this figure will grow from levels of about 34% in 2015 to about 35% by the end of our forecast period. However, there could be a downside of about 5% if the number remains flat at current levels of 34%. There could be an upside of about 5% if this figure hits 36% instead.
Wireless SG&A as % of Wireless Gross Profits: We estimate that this figure will increase from about 35% in 2015 to about 38% by end of our forecast period as Verizon may need to increase marketing expenses to compete against rivals such as AT&T, T-Mobile and Sprint. However there could be an upside of about 10% to our price estimate if this figure stabilizes around current levels. On the other hand, there could be a downside of 20% if the figure increases to about 42% by end of our forecast period.
Wireless CapEx as % of Wireless Gross Profits: We expect this figure to remain flat at levels of around 16% over the long-term, as the carrier increases capex in-line with its gross profits growth to expand its coverage and capacity. However, there could be a downside of about 5% to our price estimate if this figure increases to around 17%.
For additional details, select a driver above or select a division from the interactive Trefis split for Verizon at the top of the page.
Mobile Plans & Phones constitute the majority of Verizon's value for these two reasons:
High Revenue Per Subscriber
We estimate that Verizon's postpaid revenue per subscriber stood at around $17 per month for year 2015. In addition to this, we estimate that its average data ARPU (average data revenue per user) stood at over 34 in 2015. If we combine this we get an estimated ARPU of over $51 for postpaid users. The actual postpaid ARPU will actually be higher than this since our data ARPU is averaged across prepaid subscribers as well. Nonetheless, it does indicate that revenue per subscriber for the mobile business is higher than that for the land line phone business which stood at around $18 for 2013. This ARPU figure is considerably less than what Verizon gets from its FiOS customers. However, the number of mobile subscribers is much higher than FiOS subscribers, making mobile phones & plans Verizon's most important division.
High Market Share in a Big Mobile Market
Verizon has the largest subscriber base in the U.S. We estimate that Verizon will have around 32% share in the U.S. mobile market which will grow to around 380 million estimated connections in 2021.
Verizon's interest in mobile advertising and content
Verizon’s interest in over-the-top (OTT) services such as mobile video and advertising has been growing, as people spend more time on their mobile devices. Ad spending is quickly moving away from traditional media such as TV and newspapers, and onto mobile devices. U.S. Mobile ad spending was projected to grow by about 38% in 2015 to $42 billion, according to estimates from eMarketer, accounting for close to 21.6% of total media ad spending and 62.6% of digital ad spending. Mobile advertising seems like a natural fit for Verizon, given its massive wireless subscriber base (over 112 million subscribers), customer data sets and its control over the so-called “wireless last mile”.
In 2015, the company bought AOL in a $4.4 billion deal, gaining access to a robust programmatic and video advertising platform as well a vast library of original content. In July 2016, the company announced a deal to acquire Yahoo's operating business for about $4.8 billion, enabling it to bolster its presence in the search engine and native advertising market.
Push to increase 4G capacity and deploy 5G
All major mobile operators in the U.S. have built expansive 4G networks that offer 5-10 times higher data speeds than 3G. First to deploy LTE, Verizon has maintained the lead and has been consistently ranked the best U.S. operator in terms of network coverage and quality. Over 2015, the company has been focusing on adding capacity and density to its 4G LTE network. In 2015, the carrier announced its commitment to developing and deploying fifth-generation (5G) wireless technology. It will begin field testing its 5G data technology in 2016, with plans of “some level” of commercial deployment by 2017, making it the world’s first carrier to take a serious step into the next generation wireless technology.
Reducing focus on the landline market
Verizon has been stepping back from the declining landline market, to focus on the more lucrative wireless business, which is growing faster and is less heavily regulated. The wireless business is also not unionized, unlike the wireline business. In 2015, the firm announced a deal to sell about a quarter of its total wireline base - located in Texas, California and Florida to Frontier Communications for $10.5 billion.
Verizon's spectrum position
The wireless market is intensely competitive, with the number of wireless subscriber connections (about 355 million) exceeding the total population (319 million) in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. While there are some upcoming auctions such as the 600-MHz auction due in 2016, the airwaves will take several years to be allocated to the winners. However, Verizon should be in a relatively comfortable position with regards to its spectrum depth. The carrier won AWS licenses from multiple cable companies to expand its rapidly growing LTE network. As of November 2015, the carrier was using only about 40% of its spectrum portfolio to support its LTE network, which carries more than 80% of its data traffic.
Mobile Voice Declines Offset by Data
Mobile phone voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and reach have improved. Increasingly, data access is a significant part of usage. So, while average voice revenues have been on a downward trend, the increased data revenue contribution has helped mitigate the impact on total ARPU. Verizon has also been letting go of its feature phone subscribers, while focusing on retaining higher-value smartphone users. During Q1 2016, the carrier lost about 8,000 net postpaid phone customers.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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