Verizon Communications Stock: Bear vs. Bull

Verizon's (VZ 0.88%) stock slumped to a 12-year low on Oct. 21 after the telecom giant posted its third-quarter earnings report. Its revenue rose 4% year over year to $34.2 billion, which beat analysts' estimates by $410 million. Its adjusted earnings fell 7% to $1.32 per share, but still cleared the consensus forecast by 3 cents.

Those headline numbers weren't terrible, so why was Verizon's stock so thoroughly crushed over the past year? Let's compare the bear and bull cases for Verizon to see if it's an undervalued gem or a falling knife.

Image source: Getty Images.

What the bears will tell you about Verizon

The bears will point out that Verizon's growth in postpaid phone subscribers has slowed to a crawl over the past year. After unexpectedly losing 36,000 postpaid phone subscribers in the first quarter of 2022 amid "competitive dynamics within the industry," it only added 12,000 subscribers in the second quarter and a mere 8,000 subscribers in the third quarter.

That was a huge disappointment: Analysts had expected Verizon to gain 167,000 postpaid phone subscribers in the second quarter and another 38,500 subscribers in the third quarter. By comparison, AT&T gained 691,000 postpaid phone subscribers in the first quarter, 813,000 in the second quarter, and 708,000 in the third quarter.

Those unflattering comparisons indicate Verizon's wireless business, which generated 55% of its third-quarter revenue, could be in serious trouble as AT&T and T-Mobile ramp up their efforts to overtake the company as the largest wireless carrier in the U.S.

Verizon's total wireless revenue still rose 10% year over year (and 2% sequentially) in the third quarter as it leveraged price hikes for older data-sharing plans to offset its anemic subscriber growth. But that risky strategy could also push some of its subscribers into the arms of AT&T and T-Mobile.

Verizon expects its wireless service revenue to rise 8.5%-9.5% for the year, but that growth will be largely offset by the slower growth of its wireline division and other business segments. For the full year, analysts expect its total reported revenue to rise just 2%, while the company expects its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to dip 0% to 1.5% and for its adjusted earnings per share (EPS) to decline 3% to 5%. That bottom-line decline will be caused by the year-over-year compression of its operating margins across its consumer and business divisions:

Data source: Verizon.

Verizon blames those declines on competitive pressure, elevated promotional spending, higher device subsidies, lower revenue from its smaller wireline business, as well as inflationary headwinds. The divestment of Verizon Media last September, which removed its higher-margin digital advertising business (including Yahoo), exacerbated that pressure.

What the bulls will tell you about Verizon

The bulls believe Verizon can stabilize its business with a few strategies. It's fighting back against AT&T and T-Mobile with the expansion of its new "Welcome Unlimited" plan -- which provides unlimited text, talk, and data for $30 per month -- for budget-conscious consumers. It's also raising prices for its legacy metered plans to drive them toward its unlimited plans, and it continues to offer more flexible "Mix & Match" plans that bundle together its wireless and home internet services.

As for its margins, Verizon plans to implement new cost-cutting measures to reduce its expenses by $2 billion to $3 billion annually through 2025. However, reining in its spending a bit too aggressively could cause it to fall behind in the 5G race and weaken its marketing firepower against its two main rivals.

The bulls will also point out that Verizon's stock trades at just seven times forward earnings and pays a hefty forward dividend yield of 7.1%. The midpoint of its estimated EPS this year would only account for 50% of its annual dividend, so it still has plenty of room for future hikes. That low valuation and high yield should limit its downside potential, even as it struggles to accelerate its growth in postpaid phone subscribers and stabilize its operating margins. Therefore, investors might also warm up to Verizon's stock again as a safe haven play as interest rates continue to rise.

Is it the right time to buy Verizon's stock?

I don't think Verizon's stock will drop much further unless it loses postpaid phone subscribers again in the fourth quarter. But it will still struggle until it shows some clearer signs of a turnaround. AT&T -- which also trades at seven times forward earnings and pays a forward yield of nearly 7% -- is also gaining wireless subscribers at a faster clip than Verizon and should remain the more appealing telecom stock. Simply put, it's probably not the right time to buy Verizon' beaten-down stock yet.