Telecommunications companies have been trying for years to find ways to strategically expand their businesses beyond just providing wireless connectivity. AT&T bought DirecTV and Time Warner to both expand its distribution footprint and enter the media business. Sprint and T-Mobile are attempting to combine in order to create a company with a network and greater scale that allows them to compete more effectively with their larger rivals.
Verizon (NYSE:VZ) has made some of the oddest moves, spending $9 billion to acquire AOL and Yahoo! in order to build out a media business. But none of these businesses have fundamentally moved beyond offering smartphone connections to millions of users around the U.S.
As billions of dollars are thrown around in acquisitions that are intended to drive growth, I think Verizon is still the leader in terms of network and 5G buildout. Today, I want to highlight why I think these investments mean Verizon's biggest growth opportunity may be right under our noses.
Image source: Getty Images.
5G's speed is only part of the story
There's no doubt that customers will be excited about 5G speeds on smartphones, and they may even be willing to pay a premium for upgraded services. That'll help sustain Verizon's existing business, but it may not grow operations much at all.
Growth will come from customers using wireless telecommunications in new ways, either for services that have thus far been wired or in markets that don't currently exist. The home broadband market is one area where investors may be overlooking the potential impact of widely available 5G connectivity. The 5G wireless speeds available will meet or exceed what most cable internet service providers (ISPs) deliver now, and new devices will allow people to use it as the network behind their home internet hubs. And at $50 per month when bundled with a Verizon smartphone connection, the value of a 5G home service is compelling compared to the more-expensive cable-based internet services offered by providers that users are already shifting away from.
Verizon has struggled to gain traction for bundled services in most of the country, so this could introduce some valuable opportunities. Wireless and home internet are now the core services by which households connect to the digital world. Verizon could package these services together with third-party streaming services for a "triple play." It's no coincidence that it's giving its customers Disney+ free for a year, trying to get them to sign up for the streaming service through Verizon. Maybe Verizon will be the bundler that cable companies were in the last generation of the media industry?
Opening up new markets
5G will not only allow for wireless home internet, it'll open up markets that don't exist yet. Virtual reality (VR) is a technology that's been waiting for 5G for years. A quality VR experience demands tremendous amounts of computing power, which is why it has been difficult to manufacture headsets that don't have to be tethered to high-end computers. If some of that computing burden can be pushed into the cloud and accessed wirelessly, it would allow for lightweight, easier-to-use headsets.
Efforts to take autonomous driving mainstream will also benefit. Self-driving vehicles will be able to access 3D mapping data through 5G networks -- information that will make them more reliable and safer in their operations.
Then there's the Internet of Things -- the catch-all category that covers the vast array of newly connectable and smart devices. Many of these devices will need fast connections as they transmit video or time-sensitive data, so by providing a network that lets them do that, Verizon is essentially becoming an Internet of Things stock.
We don't know what other technologies will be enabled by faster internet speeds. Devices like smartwatches and connected cars couldn't operate under 3G and earlier networks. This 5G network upgrade should lead to similar new forms of innovation. We may not know exactly what its impact will be, but I expect there will be a lot more connected devices as 5G networks roll out, and that's good for Verizon.
Verizon's next phase of growth
You can see in the charts below that Verizon's business has been relatively stagnant over the last few years, and its margins have been under pressure due to competition from lower-priced operators like Sprint and T-Mobile. The company could use a growth catalyst, and 5G could be it.
VZ Revenue (TTM) data by YCharts
Investors shouldn't expect much revenue growth to come from price increases to upgrade mobile connections from 4G to 5G, based on the way 5G is already being included in existing plans. But Verizon will be able to add connections and potentially valuable connections like the home, which may then lead to bundling opportunities. For perspective, signing up 50 million homes to a $50-per-month service would generate $30 billion in revenue.
This opportunity to add connections could give a serious lift to Verizon's stock price, which is currently trading at a good value given its price-to-earnings ratio of 15.7 and a dividend yield of 4%. That's why I'll keep my thumbs up rating on Verizon on My CAPS page.
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December 10, 2019 at 09:45PM
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How 5G Will Transform Verizon's Business - Motley Fool
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