Verizon (VZ 1.17%), the largest telecom company in the United States, generated $137 billion in revenue in 2022. Its closest competitors, T-Mobile and AT&T, generated $80 billion and $121 billion in revenue, respectively.
Yet Verizon only has a market cap of about $140 billion, which values it at just over one times this year's estimated revenue of $135 billion. It also trades at just seven times forward earnings and pays a massive forward dividend yield of 7.7%.
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Verizon's valuations are so low because its stock price declined by more than 30% over the past ten years. The bulls retreated as it struggled to gain new wireless subscribers and keep pace with T-Mobile and AT&T in the 5G market. Its heavy dependence on promotions, new unlimited plans, and hefty subsidies also crushed its margins.
Verizon doesn't expect those headwinds to dissipate anytime soon, but it's weathered plenty of economic downturns ever since its predecessor, Bell Atlantic, was spun off from the original AT&T in 1984. So does Verizon actually have a shot at recovering over the next three decades to become a trillion-dollar stock alongside the market's tech titans?
Does the math support a trillion-dollar valuation?
Verizon's valuations are currently languishing near their multi-year lows. But prior to the pandemic, its stock was trading at about two times sales and 15 times earnings. If Verizon's valuations rise to those healthier levels again, it could potentially hit a $1 trillion market cap by generating $500 billion in annual revenue.
To grow its revenue from $137 billion in 2022 to $500 billion in 2050, Verizon would need to grow at a compound annual growth rate (CAGR) of 5%. That growth rate might seem achievable, but investors should recall that Verizon only grew its revenue at an anemic CAGR of 1% between 2012 and 2022. If Verizon continues to grow at a CAGR of just 1%, it would take more than a century to generate $500 billion in annual revenue.
But even a growth rate of 1% might be too bullish for Verizon. From 2022 to 2025, analysts expect its revenue to rise at a CAGR of just 0.3%. Its earnings per share, which are being squeezed by its aggressive promotions and loss-leading plans, are expected to decline at a CAGR of negative 1.5%. In other words, it seems highly unlikely that Verizon will come anywhere close to joining the 12-zero club by 2050.
What should investors focus on instead?
Instead of wondering if Verizon will become a trillion dollar stock, investors should focus on its three biggest problems. First, its core wireless business is struggling to gain new subscribers. It only added 201,000 postpaid phone subscribers last year, while AT&T gained 2.9 million comparable subscribers, then lost 127,000 subscribers in the first quarter of 2023.
Second, Verizon needs to implement margin-crushing strategies to gain new subscribers, but AT&T and T-Mobile are adopting similar cutthroat tactics. It also needs to ramp up its spending on the expansion of its 5G network to keep pace with T-Mobile, which shrewdly built a larger 5G network than both Verizon and AT&T by utilizing lower-band spectrums that covered wider regions. All of those challenges could reduce Verizon's operating margins and profits over the next few years.
Lastly, Verizon ended the first quarter of 2023 with $132 billion in unsecured debt, which mainly came from its buyout of Verizon Wireless (previously a joint venture with Vodafone) for $130 billion in 2014. Its inability to meaningfully reduce that mountain of debt -- which gives it a net unsecured debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.7 -- will likely make it an unappealing investment as long as interest rates stay elevated.
So what will happen to Verizon over the next three decades?
A lot can happen by 2050, but I suspect Verizon will continue to underperform the market for decades to come. It's saturated its core markets, it needs to compress its own margins to maintain its leadership position, and it will struggle to generate enough cash to reduce its debt while paying consistent dividends. All of those problems will likely drive investors to dismiss Verizon as a high-yield trap and focus on more promising blue-chip dividend stocks instead.
