Investment thesis and pitch slides for Notre Dame Investment Club. The leaders of the club, after our presentation, and after questions, decided to take our recommendation and hold the stock.
2. Investment Thesis
2
Recommendation:
Verizon (NYSE:VZ) is undervalued with respect to its substantial long-term upside as 5G
technology revolutionizes the telecom sector.
Rationale:
Verizon’s wireless network is the leader in 5G innovation. This technology will increase wireless
revenues by 3.5% and open additional revenue streams, such as IOT. Verizon also has the stickiest
customer base of major telecommunications companies, reducing potential downside.
1
2
3 IOT has potential to be a significant source of entirely new revenue
5G will increase revenue from wireless customers
Sustained market share and stickiness of revenues (lowest churn)
Price Target: $68.21
25.2% upside to current price of $54.50
3. Industry Overview
3
Overview Verizon is a Market Leader
Annual Mobile Data Usage Worldwide 4G Wireless Network U.S. Coverage as % of Land
• 95% of US adults own a cellphone
• 77% own a smartphone
• Wireless connectivity continues to expand globally
• US companies poised to expand internationally
• Both AT&T and Verizon have diversified and expanded into other
media outlets (i.e. DirecTV, Fios, Oath)
• AT&T and Verizon are both beginning planning for testing of 5G
• Verizon poised to test
• AT&T currently getting sued by Sprint
• New competition fro Cricket Wireless in the US
Verizon
35%
AT&T
34%
T-Mobile
18%
Sprint
12%
43
73
144
242
366
516
701
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
2015 2016 2017 2018* 2019* 2020* 2021*
ThousandPetabytes
70.0%
59.0% 58.0%
27.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Verizon AT&T T-Mobile Sprint
4. Company Overview
4
Company Profile Historical Stock Chart
Acquisitions Overview Revenue Breakdown ($ in millions)
• Verizon is the industry leader for telecommunications
• Verizon has two main revenue streams
• Service Revenue
• Wireless Equipment sales
• Other sources of revenue include wireline cable, Fios
• Heavily invested in the development of 5G connectivity
• Currently testing in Sacramento, Los Angeles, Houston,
and Indianapolis
• Dividend/yield of 4.46%
• Has an established group of customers developing software on
hosted servers, Thingspace 0
20
40
60
80
100
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
6-Feb-14 6-Feb-15 6-Feb-16 6-Feb-17 6-Feb-18
Millions
Volume Adj Close**
$116,122 $114,696 $108,468 $107,145 $108,605
$10,957 $16,957 $17,512 $18,889 $22,258
$127,079 $131,653
$125,980 $126,034 $130,863
$0.0
$25,000.0
$50,000.0
$75,000.0
$100,000.0
$125,000.0
$150,000.0
2014 2015 2016 2017 2018
Service Revenues and Other Wireless Equipment
CAGR: 0.7%
Verizon has expanded into the media outlet business with
acquisitions of AOL (2015) and Yahoo (2017), for $4.4 billion
and $4.1 billion, respectively.
Together, these companies formed Oath, which is now
known as Verizon Media Group
Includes Yahoo, Huff Post, Tumblr, Engadget
$4.6 billion goodwill impairment in 2017
Projected revenue of $10 billion by 2020, but
underwhelmed with $1.8 billion in 2018
• Purchased 45% of Vodafone in 2014
• $130 billion to buy Vodafone out of Verizon’s U.S.
wireless business
5. Sustained market share and stickiness of revenues
5
Industry Stability Postpaid Monthly Churn Rates (%)
Quarterly Users (Millions)
1
• Wireless connectivity and telecom services are only going to
grow
• World is becoming increasingly dependent on wireless
service for day-to-day life. Verizon has extremely loyal
customers, evidenced by having the lowest post-paid
churn rate due to their consistent service and quality
• Customers cite network reliability as the reason they
stay
• Verizon 2.0: “The realignment of our operations to better focus
on our customers. This new operating model realigns our
customer-facing units into consumer, business and Verizon
Media Group.”
• Low Beta due to saturation of the telecom industry
1.0 1.1
1.2
1.8
0.0
0.5
1.0
1.5
2.0
Verizon AT&T T-Mobile Sprint
146 147 149 150 151 153 154
134
137 139
142 144 147
150
73 70 71 73 74 76 77
59
53 53 54 54 54 54
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
Q1 '17 Q2 '17 Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18
Verizon Wireless
AT&T
T-Mobile USA
Sprint Nextel
Verizon’s low churn rate demonstrate the company’s ability to
retain customers and minimize revenue volatility
6. 5G will increase revenue from wireless customers
6
5G Technology
Towers
2
5G technology will be faster and lower latency than 4G
As much as 1,000X faster than 4G
Low latency allows for better voice, video, and cloud
applications (IOT)
Allows for more users at one time (bandwidth)
Fast enough to compete with cable internet for business of
corporations
Faster than most cable internet
Cheaper and faster to implement
• Verizon sold rights to 1,324 wireless communications towers to
American tower in 2015
• American Tower will have the rights to operate them for
28 years
• Verizon has contracted to sublease space on the towers for a
minimum of 10 years with monthly rent of $1,900 per site and
fixed annual rent escalators of 2%.
• While this price increase presents a risk for Verizon, the
revenue generated by selling more towers through 5G
should offset the risk.
Monetizing 5G in Wireless
5G technology will be available for cellphones by first half of
2019 and should have universal support by 2020
5G will require phones with compatible chips,
resulting in significantly high activations of new
devices
Cisco projects wireless bills to rise 57% in 2019 based upon
the dramatic difference in speed between 4G and 5G
Verizon’s customers have been loyal because of
network quality, likely to pay the 5G premium
48
46
41
38
35
47
42
39
37
34
38
36
35 34 34
44
40
36
33
31
$30
$35
$40
$45
$50
Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017
Verizon, adj AT&T T-Moble, adj Sprint, adj
Wireless Service ARPU
7. Internet of Things (IOT) expansion of revenues
7
What is included in IOT?
Internet Connected Devices (in Billions)
3
“The interconnection via the internet, of computing devices
embedded in everyday objects, enabling them to send and
receive data.”
With the introduction of 5G, more devices will be able to
connect to the internet
Cars
Driverless Cars
Home appliances (fridge, oven, etc.)
Lightbulbs
Children’s toys
Thermostats
Door locks
Revenue from IOT
Verizon has begun advertising to partner with businesses to
provide them greater interconnectivity
On the 4G LTE network, 1,000+ IOT partners
$1.5 Billion in revenue in 2017
14,000+ developers hosted on ThingSpace platform
1GB-$20/year (+$1/device/month)
4G LTE does not come close to meeting the need
More subscriptions to ThingSpace
More businesses partnering with Verizon
More devices that need connectivity
More revenue
15.4 17.7 20.4 23.1 26.7
30.7
35.8
42.6
51.1
62.1
75.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
8. Key Risks
8
Largest market share of all competitors
Most loyal customers
Telecommunications tend to fair well,
comparatively, during recessions
Were not the first to unveil 4G and did not lose
many customers
Verizon Media Group, formerly Oath, is
supposed to turn a profit for the first time ever
this year
Laying off employees continues to cut costs
Already has customers developing software for
IoT
Revenue concentration – 100% of wireless
revenue comes from US
Competition in the development of 5G network
Macro economic risk, market/trade tensions
causing the markets to be suppressed
Loss of wireless equipment sales, companies like
Apple and Samsung going DTC
Cost of increasing bandwidth across US will be
significant, needs to be partnered with high
revenues
Cricket may take market share if there is a
recession
Not meeting demand and losing industrial
customers to AT&T
Key Risks Mitigants
9. Final Recommendation
9
Recommendation:
Verizon (NYSE:VZ) is undervalued with respect to its substantial long-term upside as
5G technology revolutionizes the telecom sector.
Base Case
Price Target: $68.21
Upside: 25.2%
Upside Case
Price Target: $80.14
Upside: 47.1%
Downside Case
Price Target: $39.29
Upside: -27.9%