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Does the Potential of 5G Wireless Make Verizon a Buy Today?

By Travis Hoium - Feb 7, 2018 at 6:27PM

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Telecommunications may not look like a growth business today, but it's setting up for a bright future.

At a time when the market puts a lot of value in high-growth stocks and disruptive companies, it's easy to overlook a company like Verizon Communications (VZ 1.75%). The telecommunications giant is a cash machine, but you can see below that the company's revenue has stagnated, margins are falling, and competitors like T-Mobile (TMUS 1.69%) are forcing behemoths like Verizon and AT&T (T 1.67%) to lower prices. 

But looking into Verizon's rearview mirror doesn't show a complete picture of what investors are buying today. And there are great reasons to buy the stock today

VZ Revenue (TTM) Chart

VZ Revenue (TTM) data by YCharts

The past doesn't tell us everything

There's no question the 4G wireless business is getting more competitive, as are cable and broadband, and Verizon's results in the above chart reflect the challenges it faces from rivals. 

But investors buying Verizon today should be looking to 5G wireless as the real value driver in the future. The company is already a leader, along with AT&T, in deploying 5G networks, and it will roll out service in a handful of cities this year. 

We don't know much about 5G pricing or margins yet, but we do know that 5G networks will enable new technologies and connect millions more everyday devices -- including smart appliances, wearables -- to the cloud. A recent test showed that 5G wireless routers could reach speeds of up to 4 Gbps, or 73 times faster than the average home internet connection, which could upend technology as we know it. Even a standard improvement in speed of 1 Gbps would be a game-changer for businesses and consumers. 

Man using wireless phone with graphic of connection to surrounding skyskrapers.

Image source: Getty Images.

Growth in 5G network could be limitless

If Verizon remains a leader in 5G wireless, it'll have a tremendous opportunity to increase revenue. Today, a smartphone is the core of a Verizon customer's service package, with maybe an added iPad or smartwatch for advanced consumers. But with 5G, Verizon could bundle smartphone service with home internet, TV, and connections to cars, virtual reality headsets, and other devices that haven't hit the market yet

The triple play of phone, TV, and internet used to be the holy grail of telecommunications; now those services and more could be bundled and sent to consumers over the air. The barriers that blocked Verizon from offering some services -- namely, not having cables in most people's homes -- will be broken down. And if 5G wireless is better than what consumers are getting from their broadband and cable providers, it could be compelling to cut the cord of broadband in addition to traditional cable. 

Beyond the typical wireless consumer products we think of today, two potentially massive growth opportunities exist in self-driving vehicles and virtual reality devices. Both will likely use 5G networks to offload most of the computing power that devices need to the cloud. Instead of having the powerful processing power and memory on board, 5G allows that technology to be housed elsewhere. And it's Verizon that will provide the critical connection to data centers that make these technologies possible.    

New tech offers long-term potential

If you look at Verizon's history as a company, it's easy to see how the stock could be in for a tough future. But if we look at the 5G technology that's coming down the pipeline and the few competitors with the capability and balance sheet to build out large 5G networks, this business looks more attractive. 

For now, Verizon offers investors a great value with its 4.4% dividend yield, but long-term this could be a growth stock that will surprise investors over the next decade. I'm so confident in the long-term potential of Verizon that I've added an outperform call on my CAPS page, which you can check out here

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$51.64 (1.75%) $0.89
AT&T Inc. Stock Quote
AT&T Inc.
$21.31 (1.67%) $0.35
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
$136.81 (1.69%) $2.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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