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Better Buy: Verizon Communications vs. T-Mobile

By Robert Izquierdo – Apr 1, 2020 at 8:20AM

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Contrasting a giant of the industry against a smaller rival might seem unfair, but the winner of this contest could surprise you.

Verizon (VZ -1.03%) is the telecom industry's Goliath as the carrier with the most wireless subscribers, estimated at 150 million. T-Mobile (TMUS -2.01%) is the upstart David, with an estimated 86 million subscribers, battling for years to get the upper hand.

But with the company's stellar 2019, T-Mobile's time may finally be here. T-Mobile's moves forced Verizon to respond with defensive strategies in 2019.

With an unpredictable 2020 ahead due to the coronavirus pandemic, which carrier will emerge as the better buy? Let's analyze both to find out.

Mother, father, and daughter laying next to each other on a white rug at home with each person looking on their mobile phone.

Image source: Getty Images.

Verizon: sacrificing revenue for subscribers

Verizon saw solid growth in the coveted post-paid subscriber segment with 1.2 million net additions in the 2019 fourth quarter. Wireless carriers seek to grow post-paid phone subscribers because these consumers deliver higher average revenue per user (ARPU) and a lower churn rate

Verizon achieved this growth through aggressive pricing and promotions as well as the use of partners like Disney. It offered the new Disney+ streaming service free to entice sign-ups for its unlimited data plans. But these carrots translated into year-over-year revenue growth of just 1.4% for the quarter and less than 1% for the full year. 

Now, in the face of the coronavirus pandemic, Verizon is accelerating its investments in 5G technology with plans to increase its capital expenditures by roughly $500 million to a range of $17.5 billion to $18.5 billion this year. A faster transition to 5G can help improve revenue since some consumers will require device upgrades. That's because many phones today, including Apple's iPhones, are not equipped for 5G.

Even so, revenue may remain sluggish in 2020. Verizon's guidance before the pandemic called for a revenue growth rate in the low- to mid-single digits this year. But it does have the advantage of being a dividend-paying stock. Verizon has raised its dividend for 13 consecutive years. Also, the company achieved net income of $5.2 billion for the quarter and net income growth of 23.4% for the year to $19.8 billion.

A revitalized T-Mobile

Back in 2011, T-Mobile's struggles led to a merger offer from rival AT&T (T -1.42%). That deal fell apart when AT&T walked away in the face of antitrust scrutiny.

Today, T-Mobile has reinvented itself as the "Un-Carrier," a revitalized company on the verge of becoming stronger than ever through another merger. This time, it has the upper hand, merging with weaker rival Sprint (S). Even without that, T-Mobile achieved its own strong performance in 2019.

Results for its 2019 fourth quarter showed 1.3 million post-paid net additions, eclipsing much larger rival Verizon. Not only that, T-Mobile managed to grow quarterly and annual revenue by 4% in each case, with record-high revenue for both. 

Contrast the 2019 full-year results of the two carriers, and T-Mobile's strong performance against a larger rival becomes clear:

Metric T-Mobile Verizon
Revenue $45 billion $131.9 billion
Year-over-year revenue growth 4% 0.8%
Diluted earnings per share (EPS) $4.02 $4.65
Post-paid subscriber net additions 4.5 million 2.4 million

Data source: T-Mobile, Verizon.

This year will prove more of a challenge. The pandemic introduces uncertainty for both T-Mobile and Verizon. In addition, T-Mobile loses CEO John Legere (who turned the company around after AT&T's failed merger bid) when Legere steps down in May.

There's also T-Mobile's impending merger with Sprint. Combining the two companies will be a large undertaking and could cause T-Mobile to lose momentum as it shifts focus onto the integration of Sprint's operations and technology.

Still, the merger means T-Mobile will grow its subscribers. More importantly, the company will acquire Sprint's key radio frequency assets, which (combined with T-Mobile's) will give it industry-leading 5G technology. 

The final verdict

Verizon is the larger company as the carrier with the most subscribers, but its focus will have to be fending off rivals to maintain its leadership position. Its 2019 performance illustrates its struggles to find the right balance between subscriber and revenue growth.

T-Mobile wins in terms of increases in both subscribers and revenue. Also, given that the key to technology stocks is the underlying tech to provide a competitive advantage, it will have a technological leg up when its merger with Sprint closes. With the success T-Mobile is already experiencing, the company will be in an even better position after the merger to take on Goliath. These factors make T-Mobile the better buy.

Robert Izquierdo owns shares of Apple, AT&T, and Walt Disney. The Motley Fool owns shares of and recommends Apple and Walt Disney. The Motley Fool recommends T-Mobile US and Verizon Communications and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
$132.33 (-2.01%) $-2.72
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$39.52 (-1.03%) $0.41
Sprint Corporation Stock Quote
Sprint Corporation
AT&T Inc. Stock Quote
AT&T Inc.
$16.01 (-1.42%) $0.23

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