Verizon Communications' (VZ 1.17%) stock price jumped 9% on Oct. 24 after the telecom giant released its third-quarter earnings report. Its revenue declined 3% year over year to $33.3 billion but matched analysts' expectations. Its adjusted EPS fell 8% to $1.22 but exceeded the consensus forecast by $0.04 per share.
Verizon cleared Wall Street's low bar, but will its stock finally bottom out and bounce back over the next 12 months? Let's review the company's progress toward resolving its three biggest challenges to see if it's finally worth buying again.
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What were Verizon's 3 biggest problems?
Three major challenges caused Verizon's stock to plummet about 35% over the past two years: slowing wireless growth, declining margins, and high debt.
Verizon's wireless segment only gained 201,000 postpaid phone subscribers in 2022. It lost 127,000 of those subscribers in the first quarter of 2023 and only gained 8,000 postpaid phone subscribers in Q2. Most of that slowdown was caused by a loss of consumer subscribers, which offset its growth in business users.
By comparison, AT&T (T 1.02%) gained nearly 2.9 million postpaid phone subscribers in 2022 and added 750,000 in the first half of 2022. Verizon's slower growth implied it was ceding the 5G market to its smaller competitors.
As Verizon's wireless growth cooled off, it relied more heavily on margin-crushing promotions to gain more customers. As a result, the consumer segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined from 43.7% in 2021 to 40.2% in 2022.
Verizon still had $141 billion in long-term debt on its balance sheet at the end of 2022, which represented a mere 2% decrease from a year earlier. That high leverage made it an unappealing stock to own in a high interest rate environment.
Is Verizon fixing those problems?
Verizon's stock popped after its third-quarter earnings report because it made some progress toward resolving those three long-term challenges.
First, its wireless segment added 100,000 postpaid phone subscribers. The business side gained 151,000 subscribers and easily offset the consumer side's loss of 51,000 subscribers. As a result, its total wireless revenue rose 3% year over year. It also reiterated its full-year outlook for 2.5%-4.5% growth in total wireless service revenue.
Verizon has also been expanding its broadband segment -- which reported 434,000 net additions in the third quarter -- to reduce its dependence on its core wireless business. It gained more than 400,000 broadband net adds per quarter over the past four consecutive quarters, and currently serves approximately 10.3 million total broadband customers.
Second, the EBITDA margin of Verizon's consumer business widened by 190 basis points year over year to 42.8% as it reined in its aggressive promotions, prioritized higher-margin premium plans, and reduced its other operating expenses. That expansion counters the bearish notion that a price war will eventually crush the telecom giant's margins.
Verizon's stabilizing growth and expanding margins prompted it to raise its free cash flow (FCF) outlook from at least $17 billion to more than $18 billion for the full year. Therefore, it should still have plenty of cash to cover its dividend, which consumed $8.2 billion of its FCF in the first nine months of 2023. It also notably raised its dividend for the 17th consecutive year last month, which gives it a hefty forward yield of 8.5%. AT&T pays a lower forward yield of 7.2%.
Finally, Verizon ended the third quarter with $134 billion in long-term debt, which gives it a net unsecured-to-consolidated adjusted EBITDA ratio of 2.6. That only represents a 10-basis-point improvement from a year earlier, but it tells us the company is gradually chipping away at the mountain of debt that it had mainly accumulated to fund its full buyout of Verizon Wireless from Vodafone (VOD 0.12%) back in 2014.
Where will Verizon's stock be in a year?
Verizon reiterated its full-year outlook for nearly flat adjusted EBITDA growth. Based on that forecast and its current enterprise value of $312 billion, Verizon's stock still looks dirt cheap at less than 7 times this year's adjusted EBITDA.
Verizon's low valuation, high yield, and stabilizing wireless growth should limit its downside potential over the next 12 months. But just like AT&T, I don't think it will outperform the market as long as CDs are paying risk-free yields of 5%-6%. Verizon might be a safe place to park your cash for now, but it probably won't erase its multiyear losses anytime soon.
