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Why Verizon Is Up 12% So Far in 2018

By Nicholas Rossolillo – Updated Nov 19, 2018 at 9:09AM

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Who says telecom stocks are boring?

Shares of Verizon (VZ -1.73%) are up 12% so far this year, handily beating the S&P 500's paltry 2% gain as the end of 2018 nears. After years of lackluster performance, multiple trends are coalescing at once to push the stock higher -- and there's reason to believe the trend could continue.

Subscribers now, real growth later

The main reason for Verizon's 2018 advance has to do with modest gains in its subscriber base. While the pace of net new additions has slowed down substantially as the national 4G network matures, growth is growth. And it has equated to more revenue for America's leading wireless provider. In the third quarter of 2018, Verizon reported 515,000 net additions to its postpaid wireless-subscriber base. That helped produce 2.8% higher revenue than a year ago.

Year

Net Postpaid Retail Wireless-Subscriber Additions

2015

4.5 million

2016

2.3 million

2017

2.1 million

2018 YTD

1.3 million

YTD = year to date. Data source: Verizon quarterly earnings.

What's so impressive about that continued expansion of subscribers is that Verizon has pulled it off in spite of stiff competition from smaller mobile providers and a slew of new upstarts undercutting prices. The numbers prove that Verizon's advertising campaigns touting its best-in-class network actually do matter. Besides just smartphones, new devices like wearables and connected fleet services are contributing to the company's expansion. 

Also of note are Verizon's lower taxes after the passage of corporate tax reform in the U.S. at the end of 2017. Paired with rising operating profits, that has led to a doubling this year in free cash flow -- money left over after basic operations and capital expenditures are paid for. Verizon has been using that cash to pay down debt to the tune of $4.2 billion through three-quarters of 2018. Improving profits have also pushed the trailing 12-month P/E down to a mere 7.6, even after this year's run-up in valuation. 

An artists illustration of a smart city. Various devices around the city are shown getting connected to the internet.

Image source: Getty Images.

Charting the path to 5G

Another reason Verizon shares are outperforming the market as of late is the company's leadership in 5G. The company launched the world's first 5G service in four test markets in October, giving traditional internet service providers some new competition and paving the way for the progressive rollout of nationwide services in the years ahead.

And 5G networks aren't just about new capabilities for smartphones -- 5G is about providing internet coverage everywhere that is ultra-fast and low-latency (the time it takes data to travel between two points). The up-and-coming service promises to unlock new technology and uses for data -- everything from smart cities and self-driving cars to better virtual-reality experiences to connected industrial equipment. What that means for Verizon is a lot more network subscriptions from new devices outside traditional mobile phone use.

Verizon was the first to market with commercial 5G, but making it a nationwide service is going to take a while. Meanwhile, though, the telecom continues to strengthen its lead with its 4G suite of services, and that strength has equated to improving profitability and the stock's strong return this year.

Nicholas Rossolillo and his clients own shares of Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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