Verizon Communications Inc. is in a “particularly difficult position” given current trends in the wireless industry, and these dynamics have led one analyst to take a more bearish view of the shares.
MoffettNathanson analyst Craig Moffett lowered his rating on the telecom stock to underperform against market performance on Thursday, writing that he continues to see “no easy answers” for Verizon VZ given its position in the industry and evolving competitive trends in the wireless market , -2.54% .
Verizon shares are down nearly 3% in Thursday afternoon trading.
As competitor AT&T Inc. T, +0.05% has advertised more in recent years, Moffett says Verizon has pursued a more mixed strategy. Verizon has also increased its offers at times, but has recently reduced them again. As Moffett put it, “Verizon rocks
between advertising time and financial reluctance not to optimize both.”
Aggressive industry-wide promotions can result in a race to the bottom in the U.S. wireless market, and Moffett has described Verizon in the past as a sort of “elder statesman” who seemed to see the broader industry benefits of promoting restraint. But while Verizon has historically been able to sustain higher prices thanks to its strong network, T-Mobile US Inc. TMUS, +0.90%, has the quality edge in the current 5G era, and it also has lower prices.
“In survey after survey, T-Mobile is pulling away, gaining not only in download and upload speeds but also in coverage and availability,” Moffett wrote. “Verizon’s customer base, self-selected for its ‘best network’ positioning, appears to be particularly at risk.”
Verizon also now has to deal with growing competition from cable companies like Comcast Corp. CMCSA, -1.66%, and Charter Communications Inc. CHTR, -1.55%, which offer their own consumer cellular plans but use Verizon’s network through a mobile virtual network operator (MVNO) agreement.
The agreement gives Verizon some benefit from the growth of cable companies, but that growth also limits Verizon’s ability to add and retain its own true subscribers. Also, the cable providers charge less than traditional wireless carriers, with a pricing strategy that has forced Verizon and its established rivals to offer their own cheaper plans to better compete.
“To be sure, Verizon gets some value back from its wholesale contract with Cable (as long as they don’t lose more than their fair share of Cable),” Moffett wrote. “But this recapture almost certainly won’t be able to fully offset its share of retail customer losses to Cable and the industry-wide pricing disruption caused by Cable’s aggressive pricing and dramatic stock gains.”
Additionally, Moffett stressed that Verizon and its competitors have yet to realize the high 5G benefits they once expected, leading even corporate executive teams to back away from such a discussion, in his view.
“Today this enthusiasm [for incremental revenue opportunities from 5G] is mostly gone,” he wrote. “Admittedly, consensus expectations have also fallen, leaving less room for disappointment. But the cost of the one-time enthusiasm — most notably the debt associated with the massive sum Verizon spent on C-band spectrum — remains.”
Also Read: Verizon stock downgraded as Bank of America waits for 5G to become a thing.
Moffett sees Verizon with “few palatable options” and lowered his price target on the stock to $41 from $55.
He also lowered his price target on AT&T stock to $17 from $19, while maintaining a market-performance rating.
Verizon’s stock is down about 10% over the past three months, while AT&T’s is down about 9%. The S&P 500 SPX, +0.23%, is up almost 5% over a three-month period.