Buy, Sell Or Hold Verizon At $57?

by Trefis Team
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Despite only a 7% drop in Verizon’s (NYSE: VZ) stock price since the beginning of 2020, at the current price of $57 per share (as of 1st May 2020), we believe that Verizon’s stock price could see an upside considering its tie-up with Disney for its latest streaming platform – Disney+, which is expected to add to Verizon’s customer base. Home confinement of a large population is likely to lead to higher demand for streaming service and data service options. Though Verizon’s stock is about 20% higher than where it was at the end of 2017, it is still about 5.5% lower compared to where it was at the end of 2019. Our dashboard What Factors Drove 19.7% Change In Verizon Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The rise in stock price levels from end of 2017 to end of 2019 is justified by the roughly 4.6% increase in Verizon’s revenues from 2017 to 2019. Higher revenue was driven by the rise in wireless revenues on the back of increased post-paid revenue. This was completely offset by a  39% decline in net income margins. Margin dropped from 23.9% in 2017 to 14.6% in 2019, which in turn led to a 37% drop in EPS from $7.37/share in 2017 to $4.66/share in 2019, as shares outstanding remained almost stable.

The drop in earnings was more than offset by a 100% rise in the P/E multiple from 6.4x at the end of 2017 to 12.9x at the end of 2019. The P/E multiple increased due to a drop in EPS as well as rise in stock price. Despite a drop in EPS, the stock price went up as the sharp decline in margin in 2018 was primarily due to margins being unusually high in 2017 on account of large tax benefits received. Margins in fact improved in 2019. This signified that the sharp drop in profits in 2018 did not reflect a deterioration in the company’s fundamentals, but instead was driven by non-recurring items. Thus, despite a drop in reported EPS, the stock price increased due to the positive future growth outlook on the back of company’s increased focus on 5G rollout and tie-up with Disney. However, in 2020, the P/E multiple saw a marginal decline to 12.2x currently due to the coronavirus crisis.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities has led to people sitting at home. Home confinement is likely to lead to higher demand for streaming services and data service options. While lower economic growth and consumer spending could affect demand for the company’s traditional data plans to a certain extent, the company’s decision to provide 15GB of additional 4G data through 30th April is likely to help it retain customers. The company’s Q1 2020 saw revenues decline by only 1.6% on y-o-y basis, Q2 is also likely to see a revenue decline far less than trends in other industries. The company has already withdrawn its full-year 2020 revenue guidance, whereas EPS growth has been revised downward to -2% to 2% from the earlier guidance of 2% to 4%.

If there are signs of containment of the virus by mid-May 2020, the stock could see an upside with it possibly recovering fully to its pre-crisis level of $61. However, in the absence of any visible signs of virus containment by mid-May 2020, the stock price could hover around the level of $55 in the near term, with a stock price drop being buffered by an expected rise in subscriber base. As per Verizon Valuation by Trefis, we have a price estimate of $62 per share for Verizon’s stock.

You can also see coronavirus impact on a diverse set of Verizon’s peers including T-Mobile and Comcast

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

 

See all Trefis Price Estimates and Download Trefis Data here

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