Fixed Wireless Access Expansion And AI Ecosystem Ventures Will Strengthen Future Market Position

Key Takeaways

• Verizon's expansion in fixed wireless and leveraging fiber and edge assets for AI positions it for future revenue growth and foundational market status.
  
• Business transformation, including workforce reduction and capital allocation strategies, aims to enhance net margins, flexibility, and positively impact future EPS.
  
• Significant capital investments and external factors may challenge Verizon's financial stability, impacting margins and cash flow amidst pressures from declining wireline revenues and regulatory scrutiny.

Catalysts

Through its subsidiaries, engages in the provision of communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide.

• Verizon is focusing on expanding its fixed wireless access, with a target of 8 to 9 million subscribers by 2028, which will likely increase future revenue in broadband services.
  
• The company is leveraging its fiber and edge compute assets to open new revenue streams from the AI ecosystem, positioning itself as a foundational player, which is expected to drive revenue growth.
  
• Verizon's business transformation efforts, including a significant workforce reduction and efficiency improvements, are poised to enhance net margins and operational flexibility.
  
• The strategic scaling of private networks and new partnerships could strengthen Verizon's positioning in enterprise markets, potentially boosting earnings through diversified service offerings.
  
• Verizon's continued focus on capital allocation, including debt reduction and a potential future focus on share repurchases, might positively impact earnings per share (EPS) in the long run as leverage decreases.

Verizon Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Verizon Communications's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $21.5 billion (and earnings per share of $5.08) by about January 2028, up from $17.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the GB Telecom industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Verizon Communications Future Earnings Per Share Growth

Risks

• The impact of wildfires and other natural crises could lead to disruptions in service and additional operational costs, potentially affecting net margins.
  
• Investments in fixed wireless access and Fios expansion require significant capital expenditure, which may pressure free cash flow and net margins if not yielding expected subscriber growth.
  
• The pending acquisition of Frontier could introduce integration risks and additional regulatory scrutiny, potentially impacting future earnings.
  
• Declines in business wireline revenues present ongoing pressures, which could negate gains from wireless service revenue, affecting overall earnings stability.
  
• Changes in cash tax legislation and higher upgrades could increase financial burdens, affecting net margins and available free cash flow negatively.

Valuation

• The analysts have a consensus price target of $47.28 for Verizon Communications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $40.79.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $142.3 billion, earnings will come to $21.5 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $40.4, the analyst's price target of $47.28 is 14.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.