The week before last, Warren Buffett's conglomerate Berkshire Hathaway (BRK.A 2.10%) (BRK.B 2.12%) released its 13F filing, showing the company's stock buys and sells for the fourth quarter, and there weren't too many newsworthy items. However, one thing stuck out to this technologist and Buffett-watcher: a big telecom buy in Verizon (VZ 0.80%) and a big add to the company's existing position in rival T-Mobile (TMUS 1.03%).
It's perhaps not a surprise that Buffett and his investing team are looking hard at "safe" ways to play the 5G transition today, just when the first 5G iPhones are hitting the market. It's interesting, however, that Berkshire is betting on two different horses in this high-stakes race.
Verizon looks like Buffett, T-Mobile looks like Todd or Ted
Given what Buffett has said about how he and his investing proteges Ted Wechsler and Todd Combs invest, it appears the Verizon and T-Mobile bets were made by two different people at Berkshire. The relatively larger size of the Verizon bet leads me to believe that it was made by Buffett, whereas the relatively smaller size of the T-Mobile buy means that was likely done by either Wechsler or Combs. Buffett gives Todd and Ted their own portfolios in which to invest as they see fit without his interference. As of 2019, both managers ran about $13 billion each, and that amount is likely higher now.
In the fourth quarter, Berkshire bought a lot of Verizon, scooping up 146.7 million shares worth about $8.6 billion, making Verizon Berkshire's sixth-largest position. In contrast, the fourth quarter saw Berkshire increase its existing T-Mobile stake by 2.8 million shares, or 117%. However, even that big increase only brought the position to $707 million, less than 10% of the Verizon stake and only the 28th largest position in the Berkshire portfolio. The original T-Mobile position was first initiated in the prior third-quarter 2020.
It's interesting that Buffett and one of his proteges are taking opposite sides in this intense competition. However, it's possible there will be more than one winner if a big industry trend like 5G lifts all telecom boats. Additionally, although they're both competitors in the same industry, both T-Mobile and Verizon have different characteristics that may appeal to different types of investors.
The case for Verizon
First is Buffett's likely rationale on Verizon: It's a cheap value stock with a high dividend that has traditionally been very stable, not unlike a fixed income security. Remember, Berkshire's investments are matched against its insurance liabilities, and insurance companies usually buy safe bonds with most of their float against their liabilities. Berkshire differs from its peers by buying equities with upside, yet Buffett still seeks the downside protection and stability of bond-like securities, even in his equity holdings.
Currently, Verizon's dividend stands at 4.4% -- large in today's low-interest rate environment. Its current price-to-earnings (P/E) ratio is just 13.2, and its forward P/E ratio is a mere 11.3, which is very low. In fact, it's in the running for the cheapest large-cap stock in the market.
Furthermore, Verizon has long had the reputation of having the best 4G network. In the switch to 5G, Verizon has pursued the strategy of rolling out the very highest speeds with its mm-Wave Ultra Wideband rollout in small areas of big cities. These are multigigabit wireless services, but because mm-Wave doesn't travel very far, that service is only available in very small sections of Verizon's overall footprint.
The company has also cemented its premium image with partnerships and cross-promotions with A-list brands like Disney+, Apple Music, and Discovery+, offering a free six months to one year of these services when consumers sign up for unlimited plans or other premium plans.
Finally, Verizon also "rents out" its leading network to others, wholesaling its network to cable companies Charter and Comcast, which are now offering mobile plans to their customers to bundle with broadband as landline phones die off. Buffett tends to like premium brands, cheap prices, and dividends in his stock buys. As such, it's no surprise to see him pick Verizon.
The case for T-Mobile
While Verizon is the premium incumbent, T-Mobile is the scrappy challenger. For years, T-Mobile had a lower-quality network than Verizon and others, but made up for that with low prices and other customer-friendly perks. Over the years, T-Mobile didn't pay a dividend, but continued to invest in its network and buy spectrum, getting to virtual equality with the other industry leaders over the past few years. However, T-Mobile has still kept its lower-priced, customer-friendly ethos even as its network improved and it's taken market share.
But T-Mobile's story gets more exciting with the advent of 5G. Following some savvy spectrum purchases years ago, T-Mobile was able to close the blockbuster acquisition of Sprint on April 1, 2020. Not only will that greatly increase T-Mobile's customer base and lead to an estimated $6 billion in cost synergies, but the combined company now has the broadest 5G spectrum portfolio in the industry. T-Mobile has an especially big advantage in mid-band spectrum right now. While not as fast as Ultra Wideband, mid-band offers a great mix of coverage plus speeds that are much higher than 4G.
As opposed to Verizon, T-Mobile is strategizing for 5G coverage first, concentrating on low and mid-band, rather than mm-Wave as Verizon is (though T-Mobile has mm-Wave, too). T-Mobile already has nationwide low-band 5G coverage and recently reached 106 million people with mid-band coverage, on the way to 200 million by the end of 2021.
Verizon and AT&T just spent a fortune in December's spectrum auction, with Verizon shelling out $45.5 billion and AT&T paying $23.4 billion for new spectrum, with a lot of that going to important mid-band in order to close the gap with T-Mobile. In contrast, T-Mobile only spent $9.3 billion. However, a lot of that spectrum won't be available for years, so T-Mobile should retain its spectrum advantage in the meantime.
Basically, T-Mobile seems likely to have an advantage in 5G coverage over the next couple of years as customers begin to get their 5G phones. Combined with lower prices and a lack of a dividend -- and therefore freedom to invest heavily in the network -- this is a tantalizing opportunity for T-Mobile to steal even more market share and change its image in the 5G era. Trading at 45 times earnings but growing faster than Verizon, T-Mobile is the disruptor in the space, while Verizon is the well-heeled incumbent.
Could both win?
Currently, I like T-Mobile's prospects more than Verizon's, as its recent history of success, current 5G spectrum advantage, and the potential to offer customers more for less in the 5G era are very compelling. We're also in an age that tends to favor the disruptors over incumbents.
However, there's a case for both stocks. It's possible Verizon can retain its premium status by luring customers interested in the very highest speeds for special applications for its Ultra Wideband strategy. Moreover, the telecom industry is relatively stable, without huge swings in market share. Companies typically only churn about 1% of their customers, so it's possible Verizon can maintain share until it gets the recently purchased spectrum from the auction and rolls it out.
There's also a case that 5G could open up more revenue opportunities for all involved. These may include disrupting traditional cable companies with wireless broadband. In fact, both companies have already begun campaigns to pitch 5G as a broadband replacement, with Verizon in major cities and T-Mobile looking at rural and suburban markets, where fast broadband is more scarce. Furthermore, 5G networks could also expand at the enterprise, especially for automated farms, factories, and other industrial sites that need a dependable and fast network to fuel the internet of things.
Basically, it's possible 5G could expand revenue opportunities for all involved. In that case, it's no surprise to see Berkshire betting on the sector. Though Verizon should be a dependable, yield-producing instrument, I still like the disruptive potential of T-Mobile best in this race.