Verizon Communications (NYSE:VZ) shares have underperformed the market, as slow subscriber growth and increased pricing competition from the likes of T-Mobile (NYSE:TMUS) and AT&T (NYSE:T) have spooked shareholders. However, in a CNBC interview on Thursday, Verizon's CEO, Lowell McAdam, revealed something that might change investors' outlook.
What was said?
According to McAdam, Verizon added more than 1.4 million net postpaid subscribers in the second quarter of 2014. He also noted that the company saw record tablet growth and very strong smartphone growth in the period. As a result, shares jumped midday on Thursday to trade with gains of nearly 1.5%.
While 1.4 million is obviously a big number, those who haven't followed the Verizon, AT&T, and T-Mobile subscriber ordeal likely don't realize just how meaningful this news is for Verizon. First, let's rewind to the first quarter of 2014.
In that quarter, T-Mobile actually led the pack in new postpaid subscribers with 1.3 million in the period. AT&T was second with 625,000, while Verizon came in at third with just 539,000. Typically, this order would be reversed, as Verizon is the nation's largest carrier and T-Mobile is the fourth-largest.
Yet, T-Mobile's aggressive pricing and incentives, such as cash for phones and paying customers to switch carriers, gained it new subscribers. As a result, AT&T made cuts of its own to attract customers, which helped grow its subscriber base. However, Verizon has been rather stubborn about maintaining current prices, noticeably lagging its peers, and also its year-ago period where it gained 677,000 subscribers.
What does this mean?
While T-Mobile and AT&T were outperforming Verizon in total number of subscribers gained, both companies are also seeing lower revenue per user due to the lower prices. BTIG recently estimated that AT&T will see a 5% year-over-year revenue decline in the second half of this year due to lower prices. Meanwhile, the firm said Verizon could grow at a low-to-mid-single-digit rate, despite significantly slower subscriber growth.
With all things considered, this is where the story ended: Verizon is growing subscribers slowly, but revenue moderately, due to higher prices, while AT&T is sacrificing current revenue for long-term subscribers. However, Verizon threw a curve ball on Thursday, adding 1.4 million net postpaid customers in just one quarter. In retrospect, it almost seems that Verizon didn't lose anything from the pricing competition, and that its second quarter saw a boost from the first quarter's weakness.
Moreover, Verizon's success indirectly creates problems for AT&T, whose discounting means it must attract a high volume of new subscribers. Unfortunately, Verizon has set the bar quite high for the second quarter with 1.4 adds, and notably without any new big product releases. Hence, investors should be wary of AT&T, while feeling quite good about Verizon.
This is great news if you're a Verizon investor, as it insinuates better-than-expected growth, possibly raised guidance, and most importantly, it signals that AT&T and T-Mobile's initiatives aren't having as bad of an effect on subscribers as previously anticipated.
As a result of this news, Verizon looks like a good investment. How consumers would respond to its pricing has been the No. 1 concern of analysts in the last few months, and that question has, apparently, been answered.
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Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.