Verizon's (VZ +0.29%) stock dropped 9% this year, underperforming the S&P 500's 17% gain by a wide margin. The telecom giant struggled with earnings misses, its first-ever decline in core wireless subscribers, free cash flow issues, and a murky outlook for its $4.5 billion acquisition of Yahoo's internet business. That's why analysts expect Verizon's revenue and earnings to respectively dip 1% and 3% this year.
But in fiscal 2018 (which starts in calendar 2018), Wall Street expects Verizon's revenue to rise 2%, and for its earnings to grow 3% -- solid growth rates for a stock that trades at just 12 times forward earnings. Let's take a look at what investors should expect from Verizon next year.
Image source: Getty Images.
The evolution of Oath
In June, Verizon launched Oath, a new subsidiary that merged AOL (which it acquired in 2015) with Yahoo's internet business. Oath's portfolio includes over 50 media and technology brands, including HuffPost, Yahoo Sports, AOL.com, and TechCrunch.
Oath's ecosystem reaches over a billion people per month and generated $2 billion in revenues last quarter, but Verizon hasn't fully explained how it will integrate Oath into its core wireless, wireline, and TV businesses. During last quarter's conference call, CFO Matthew Ellis stated that Verizon "will provide additional information on Oath in future quarters" as it integrates the business.
The introduction of online TV
However, one Oath strategy that was already revealed is Verizon's upcoming online TV service. Oath CEO Tim Armstrong has been assigned to integrate Oath's ad placement system (which is currently used in its network of websites) into the upcoming platform, which Verizon claims will launch in the spring.
Armstrong is also responsible for fixing Go90, Verizon's mobile streaming video platform, which flopped due to competition from entrenched players like YouTube.
However, both platforms still face intense competition from rival services, which include AT&T's (T 0.04%) expanding DirecTV ecosystem, Dish Networks' Sling TV, and Comcast's (CMCSA +0.56%) Xfinity X1.
Image source: Getty Images.
More media acquisitions
AT&T's planned purchase of Time Warner will likely force Verizon to make a comparable acquisition in the escalating battle of controlling both the pipes and the content.
That's why recent reports indicate that Verizon and Comcast are both interested in buying parts of 21st Century Fox. If Verizon buys Fox's media assets, its business model could become more similar to Comcast's, which is split between its ISP business and NBCUniversal.
More investments in adjacent markets
Over the past two years, Verizon acquired Telogis and Fleetmatics to boost its presence in telematics for connected cars. It also bought drone operations company Skyward. These acquisitions are expanding Verizon's wireless reach beyond the highly saturated smartphone market.
Last quarter, Verizon added 274,000 wireless phone subscribers and 91,000 tablet subscribers. However, it also added 238,000 "other" wireless devices, led by connections for wearables. This expansion into other devices -- which include cars and drones -- could eventually offset any declines in phone subscriptions.
Increased investments in 5G networks
Earlier this year, Verizon acquired Straight Path and XO Communications to strengthen its fiber assets ahead of its 5G fixed broadband rollout next year. Verizon also recently teamed up with AT&T in a joint partnership with Tillman Infrastructure to build hundreds of new towers.
More divestments of non-core assets
Verizon's aggressive expansion plans caused its long-term debt to hit $115.3 billion last quarter, up from $105.4 billion at the end of 2016. Just $2.2 billion of that total matures within the year, but Verizon will likely divest some non-core businesses to reduce its debt load.
It's already sold data centers, its cloud businesses, and landline assets over the past two years to focus on the expansion of its digital ecosystem and 5G networks, so investors should expect additional divestments in 2018 as its spending accelerates.
The bottom line
Verizon, like many of its telco peers, is slowly evolving. Its growth might seem glacial, but its investments in online advertising, streaming videos, and adjacent wireless markets will likely pay off over the next few years.
Until that happens, investors should sit back, relax, and collect its generous forward yield of 5%, which is supported by a low payout ratio of 59%. Verizon has hiked that dividend annually for ten straight years.
