Verizon (VZ 1.17%) stock has been a value destroyer over the last few years, but the telecom giant took a significant step toward rectifying that narrative on Tuesday.
Verizon shares soared, finishing the day up 9.3% after it beat estimates on the top and bottom lines, and raised its free-cash-flow guidance by $1 billion to $18 billion.
The business is still facing challenges as revenue and profits both fell in the quarter, in part due to an ongoing decline in equipment revenues, but expectations for the company had fallen so low after years of market-share losses to T-Mobile and a strategy that's failed to deliver growth that the stock had a low bar to clear.
Now the company is taking steps to solve the biggest pain point in its business in recent years.
Image source: Getty Images.
The spectrum question
Part of the reason Verizon lost out in the competition against T-Mobile was its poor spectrum strategy. The company launched 5G on the highest frequency allowed, but its pre-existing towers were spaced for coverage rather than speed. As a result, customers have complained of gaps in its coverage, and many have switched to competitors.
However, the company now seems committed to solving this challenge and has stepped up efforts to acquire spectrum to improve its coverage. Though it's still losing postpaid phone subscribers in its consumer division, the losses have improved, and it's seen strong subscriber growth in its business segment.
Management said on the earnings call that it gained early access to its remaining C-band spectrum and added that in cities where that spectrum has already been deployed, it's seeing two to three times the increase in spectrum depth and peak speeds have nearly tripled from 900 megabits per second to 2.4 gigabits per second.
CEO Hans Vestberg said, "You've heard me say this before, but let me say it again. C-Band is a game-changer for our business, giving us better customer retention and step-up as well as strong broadband opportunity with fixed wireless access."
Additionally, Vestberg noted that the additional mid-band spectrum gives Verizon better performance on the street and helps it fill in the gaps from the earlier build-out of its high-frequency, millimeter-wave technology.
Even better, the costs to deploy that spectrum are mostly behind the company as it paid $3.7 billion in spectrum clearing costs out of operating cash flow, and it said remaining payments will be minimal.
What it means for Verizon stock
As Verizon's share price has declined in recent years, the stock has become even more attractive for its 7.8% dividend yield after the stock's pop on Tuesday.
Investor expectations for the stock have fallen sharply along the way, making Verizon stock dirt cheap at a price-to-earnings (P/E) ratio of just 7.3 based on its forecast of $4.55 to $4.85 in earnings per share (EPS) this year. In other words, Verizon is priced for essentially no growth, and it won't take much for the business to overcome those low expectations from here.
With the successful deployment of its C-band spectrum and improvements to its coverage and speed, it now looks like the worst is behind the stock.
Profits are expected to stabilize next year, and the company plans to commit more cash to paying down its debt. Capital expenditures are also projected to come down modestly, which will give a boost to cash flow.
Keep an eye on the company's progress in postpaid phone subscribers in the coming quarters for evidence that the spectrum strategy is working, as its coverage and speed appear to have meaningfully improved. If that translates into more customers, the stock should be on a better path going forward.
