Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) are the two biggest wireless telecoms in the U.S., operating atop an oligopoly they share primarily with discount providers Sprint and T-Mobile. On the surface, the two companies have a lot in common, but there are key differences in their strategic directions.
Before we get into whether Verizon or AT&T is the better stock, let's look at the business models of these companies today and how they've built themselves to compete.
The biggest competitive advantage Verizon and AT&T share is their sheer size. It takes billions of dollars to build a wireless network, and they have taken out billions in debt to do just that. Below are charts of their debt, market cap, and enterprise value.
These metrics offer a sense of how the market is valuing these companies, and show how much leverage they have. AT&T is slightly bigger from a market-cap perspective, but it has a lot more leverage (i.e. more debt) than Verizon.
AT&T's debt largely comes from its big acquisitions of DirecTV and Time Warner, which changed the company's strategic position. And that business model shift is also where these giants start to diverge.
Different views of the wireless industry
In the past five years, Verizon and AT&T have been making strategic additions in an attempt to bolster their positions in the telecommunications industry. Verizon added AOL and Yahoo! to improve their online presence, but the aging internet companies haven't had a big impact on its operation. As a result, Verizon has gone back to focusing on its core business and partnerships that can augment its wireless offerings. Offers of a free year of Disney+ and Apple Music for its unlimited-plan customers get them enrolling in those streaming services through Verizon. Effectively, the telecom is a reseller, bundling other services for its customers.
AT&T went in a different direction, buying content that it could distribute to customers. With Time Warner, it now owns HBO and the upcoming HBO Max app, which it aims to make a must-have streaming subscription. The ability to combine content ownership and distribution is what AT&T views as a core strength in telecommunications today.
When it comes to their wireless networks, Verizon and AT&T are fairly similar. But Verizon is betting that horizontal integration and partnering with as many content companies as possible is the best long-term strategy. AT&T is betting on vertical integration.
Which made the better bet may become clearer as they roll out their 5G networks more widely and start offering the option of bundling 5G smartphone services with 5G home connections. Verizon will be trying to expand the number of connections in its service bundles while AT&T will have an incentive to give favorable positions to its Time Warner content and DirecTV, which may not be what customers want.
Given the conditions in the media industry now, investors should favor Verizon's strategy. AT&T could be painting itself into a corner with one of the weaker streaming options (compared to Netflix and Disney+). Other content companies may be less enthusiastic about partnering with it, because it's also a competitor.
The better buy today
Between the two, I think Verizon is the better stock to invest in now because of its superior strategic position as a new wave of media and telecommunications bundles comes out. It's well-positioned to take advantage of these industry dynamics. But it's worth mentioning that Verizon also trades at a slight premium to AT&T from a dividend and enterprise-value-to-EBITDA standpoint.
However, the premium is small enough that I think Verizon will generate more value than AT&T long term, so it's the wireless industry stock I would buy today.