Verizon (VZ 0.88%) hasn't been an investor favorite for more than a decade despite being one of the more profitable companies on the market. Investors don't like the large capital investment wireless communications requires and simply don't see Verizon as a growth stock.
That narrative could be changing as 5G wireless rolls out. Verizon may not see a lot of growth in 5G smartphone connections, but the number of overall connections and the value of the services it offers to millions of customers could increase quickly in the next few years. And its very reasonable valuation makes this a stock worth keeping a close eye on.
Verizon's growth plan
5G was always about more than just fast connections for smartphones. Internet speeds faster than most wired connections should open up a new world of possibilities for Verizon.
The most important could be Verizon reaching into the home to replace current broadband connections. Management expects that fixed wireless household coverage will cover 15 million people by the end of this year and 50 million households by the end of 2025. As that coverage grows, Verizon will be able to offer stand-alone home internet service and bundles for current wireless customers. Management thinks these additions could lead to 4% annual growth, but considering that 5G home internet will be the first viable competitor to cable for millions of Americans, I think adoption could pick up quickly.
On top of the home, Verizon will be adding new products in connected cities and autonomous vehicles that could drive additional growth. And if the growth narrative changes, the stock could end up being a big winner for investors because the shares look very undervalued.
Is Verizon undervalued?
Verizon's stock looks extremely cheap by today's market standards. Shares trade for just 13 times trailing earnings and have a 4.5% dividend yield.
Compared to T-Mobile (TMUS 0.13%), shares look enticing even in the wireless telecommunications space. T-Mobile has a slightly higher price-to-sales multiple, but its earnings multiple is 3.5 times higher.
What T-Mobile has going for it is growth. The company added 5.6 million customers in 2020, while Verizon lost 100,000 connections.
What Verizon has going for it is better operational results. You can see above that its operating margin is more than double that of T-Mobile, which leads to more money to invest in expanding the network and paying dividends.
If Verizon can turn around its growth story and combine that with great operations, it deserves to be a much more highly valued stock. And with Verizon Home and other 5G services coming down the pipeline, the narrative for the stock could change in the next few years.
Buy while Verizon is out of favor
There isn't a lot of love for Verizon today, and that's why I think it's the perfect time to buy the stock. We know 5G is coming, and we know home wireless growth is nearly inevitable. Now it's just time to wait for the growth to come in for Verizon.