When it comes to investing in relatively stable, high-yield telecom stocks, there might not seem to be a big difference between Verizon Communications (NYSE:VZ) and AT&T (NYSE:T). Both have a huge wireless customer base and have yields around 4.7%.
Both telecoms also have similar problems. These include high debt loads, price competition from T-Mobile US and Sprint, and growth headwinds due to the fact they are already so large. In a recent note, Moody's downgraded the entire telecom sector, citing an unhealthy level of competition in the industry after Verizon threw in the towel and started offering unlimited data. It was the last holdout among the big four.
To cope, both companies have made several acquisitions in adjacent businesses and geographies, but in very different ways. Who has the better strategy? Let's dive in.
Verizon: The bolt-on king
Verizon has long been regarded as having the country's most advanced network. As such, it is not attempting to stray too far from being a wireless company. Its acquisitions have mostly been small, and in the adjacent fields of digital media, telematics, and next-generation fiber.
For digital media, the company bought AOL for $3.8 billion in 2015 and is working on acquiring Yahoo!'s core business in a deal now at $4.48 billion. AOL's assets include its core email service, The Huffington Post, TechCrunch, and Mapquest, along with a digital advertising business. Yahoo!'s core business brings its email and search assets, plus its well-known finance, sports, and lifestyle pages, which have roughly 1 billion monthly active users. As of 2016, it had an estimated 2% of the global digital ad market. Verizon is hoping to combine these two acquisitions with its own mobile analytics to create a digital advertising rival to Facebook and Google.
In telematics, Verizon last year bought Fleetmatics for $2.5 billion, which provides mobile workforce and fleet management solutions, and Telogis, which makes software for mobile enterprise management, for $900 million. These businesses contributed only $1 billion in 2016, but they give Verizon a foothold in the fast-growing Internet of Things (IoT) industry.
Earlier this year, Verizon acquired XO Communications for $1.8 billion, which has one of the largest fiber IP and Ethernet networks. Verizon believes this acquisition of high-speed "backbone" will help it build out its next-generation One-Fiber offering to homes and businesses, and accelerate the build-out of its 5G network.
AT&T: Go big or go home
AT&T is already a more diversified business. It actually gets a majority of its revenue from its enterprise network segment, not its wireless segment. Thus, its acquisitions have been much bigger, bolder moves into the world of entertainment content, as well as Mexico's telecom industry.
In 2015, AT&T bought GSF Telecom and Nextel Mexico for $4.4 billion to expand in the Latin American market. International revenue was $7 billion in in 2016. AT&T was much bolder on the entertainment content front, with the $47 billion takeover of DIRECTV in 2015, giving it a tremendous cable subscriber base in both the U.S. and Mexico. In 2016, the company made an even bigger move with a $85.4 billion bid to purchase Time Warner (NYSE:TWX), which includes HBO, TNT, CNN, and Warner Bros. studios.
Which is better?
I happen to believe that the world of technology and media is moving very fast, and thus requires bigger, bolder moves. Therefore, I'm going with AT&T in this matchup of which is spending its money better. Legendary cable entrepreneur John Malone also gave his thumbs-up to the proposed AT&T/Time Warner deal, explaining there were big advantages to merging Time Warner's content with AT&T's network.
To me, Verizon's strategy could end up being like the "prevent" defense in football -- an overly cautious posture that can backfire. That being said, it's possible Verizon's leadership in 5G could pay dividends, or that its digital and IoT incubation could really take off. However, those opportunities are still unclear. The digital assets it bought combined for less than $10 billion in revenue, so those would also have to grow a lot in order to move the needle for a company as big as Verizon.
There are risks to AT&T's strategy, of course. The company will have roughly $150 billion in debt post-deal, and it's also not a forgone conclusion the Time Warner deal will even go through. To me, however, AT&T is being more aggressive in innovating its business, and is also more diversified, making it a better choice for investors.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of GOOG, AT and T, and FB. The Motley Fool owns shares of and recommends GOOGL, GOOG, FB, Moody's, and Verizon Communications. The Motley Fool recommends Time Warner, T-Mobile US, and YHOO. The Motley Fool has a disclosure policy.