Why Did We Increase Verizon’s Stock Price Estimate By 15% Within 6 Months?

by Trefis Team
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Trefis raised its stock price estimate for Verizon (NYSE: VZ) by almost 15% in less than six months. Trefis currently has a stock price estimate of $62 per share for Verizon’s stock, which is an increase from an estimate of $54/share in July 2019 and $59/share in November 2019. This increase in price estimate is driven by a rise in the company’s valuation multiple (forward P/E) from 12x to 15x, which is a reflection of the increase in dividend pay-out and the expected strong take-off in the 5G market. Verizon increased its dividend per share from $0.6025 at the end of Q2 2019 to $0.6150 in Q3 2019.

5G Services

  • Along with higher dividends, the most important factor in Verizon’s increased valuation is its bet on 5G service.
  • Ericsson, the Swedish telecom company that provides networking equipment to wireless carriers, predicts that by the end of 2025, 5G internet will cover 65% of the world’s population and will handle 45% of all the mobile data traffic globally. 5G is also expected to drive an increase in average monthly consumption of mobile data, to 24GB from 7.2GB today, something Verizon is banking on.
  • As of November 2019, Verizon’s 5G Ultra Wideband service is available in select parts of several cities, including Boston, Houston, Dallas, Washington, D.C., Atlanta, and New York City.
  • With growing competition from AT&T and T-Mobile, Verizon has inked deals to bring 5G to 13 NFL stadiums this season, with plans to expand further. The NFL stadium deals are an important part of Verizon’s 5G rollout strategy, given many of these stadiums are located in dense urban areas and draw a lot of interest from the surrounding communities, meaning potential customers for Verizon’s 5G network.

We break down the stock price estimate into 4 drivers – revenue, net income margin, number of shares, and P/E multiple. To see how each of these drivers are performing, view our interactive dashboard analysis – Verizon Valuation: Expensive or Cheap?

Total Revenue

  • Verizon’s total revenues have increased from $126 billion in 2016 to $131 billion in 2018.
  • We expect revenues to grow to over $133 billion by 2020.
  • Revenue growth is likely to be led by healthy growth in the wireless segment, due to rising user count and higher ARPU.

To see how each operating division of Verizon is performing and what is the outlook, and also how Verizon’s revenue growth trend compares with its major peers, view our dashboard analysis.

Profitability

  • Net Income grew from $13.1 billion in 2016 to $15.5 Billion in 2018, with it being unusually high at $30 billion in 2017.
  • The sharp jump in 2017 was due to one-time tax benefits realized with the implementation of the TCJ Act.
  • We expect net income to be around $17 billion in 2020.
  • This growth will likely be led by higher margins and an elevated revenue level.

EPS

  • EPS has grown from $3.21 in 2016 to $3.76 in 2018. The sharp jump to $7.36 in 2017 was due to higher net income on the back of tax benefits recorded. We estimate EPS to be $4.15 in 2020.
  • EPS growth from 2018 can be attributed to higher Net Income, partly offset by a higher share count.

Price Estimate

Trefis has a price estimate of $62 per share for Verizon’s stock. The price estimate is arrived at by using the discounted cash flow valuation technique, which you can find in Verizon’s detailed financial model here. Based on projected EPS of $4.15 per share and stock price estimate of $62 per share, Verizon’s forward price-to-earnings multiple stands at 15x.

To understand how Verizon’s P/E multiple compares with its major peers, view our dashboard analysis.

 

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