The COVID-19 outbreak has led to a surge in remote working, online education, and higher subscriptions for streaming services, thus emphasizing the demand for more robust 5G technologies. 5G, the next generation of wireless technology, is expected to incredibly improve speed compared to the current 4G LTE networks.
Major US wireless services providers Verizon, AT&T and T-Mobile have been investing billions of dollars in building 5G networks. Using the TipRanks’ Stock Comparison tool, we will compare telecom giants AT&T and Verizon to see which stock offers a more compelling investment opportunity.
AT&T (T)
Over the past few years, AT&T made some major acquisitions in the media space to diversify beyond its core telecom business. But such diversification didn’t save the company from the impact of COVID-19.
Recently, the Wall Street Journal reported that AT&T is in talks with private-equity bidders for the sale of a majority of its satellite-TV business—DirecTV. The shift to streaming services (often called cord cutting) has significantly impacted the DirecTV business, which AT&T acquired in 2015 for $48.5 billion.
In the second quarter, the company lost 886,000 premium TV subscribers for DirecTV, U-verse, and AT&T TV compared to the loss of 68,000 subscribers for the company’s live streaming service AT&T TV NOW. The company also lost 151,000 postpaid phone subscribers in the quarter.
Overall, the pandemic had a $2.8 billion adverse impact on AT&T’s businesses in the second quarter, causing an 8.9% Y/Y decline in revenue to about $41 billion. Closure of movie theatres, postponement of theatrical releases and lower advertising revenues due to the lack of televised sporting events dragged down the top-line. The second-quarter adjusted EPS fell 6.7% to $0.83.
The aforementioned headwinds caused a 22.9% plunge in the sales of AT&T’s WarnerMedia segment, which comprises Turner, HBO (Home Box Office) and Warner Bros.—businesses that were added when AT&T acquired Time Warner in 2018.
Meanwhile, the company’s Mobility unit fared better than other businesses and reported a 0.8% revenue decline, including a 1.1% fall in wireless service revenues to $13.7 billion due to lower international wireless roaming services.
AT&T launched HBO Max in May to capture growth prospects in the streaming space. In its second-quarter conference call, the company disclosed that HBO Max saw 4.1 million activations since its May 27 launch. HBO Max faces intense competition from Netflix, Amazon Prime Video and Disney+.
Significant acquisitions over recent years and investments in 5G network added huge debt to AT&T’s books. As of the end of the second quarter, AT&T had long-term debt of over $153 billion. In the first half of the year, the company’s capital expenditure was $9.4 billion.
On July 23, AT&T announced that its 5G network is now available nationwide, covering 205 million customers in 395 markets.
On August 31, Scotiabank analyst Jeffrey Fan downgraded AT&T stock to Sell from Hold to reflect the impact of mid-band spectrum costs and lowered the price target to $30 from $34. The analyst also expressed concerns about the company losing wireless market share to T-Mobile as the latter expands its 5G mid-band network.
The analyst stated, “While the shares may look attractively valued on an absolute basis and relative to its peers, we think it will remain cheap until T can stem its wireless share loss and/or undergo a significant structural change to its asset mix, which is currently burdened by the exposure to DirecTV.” (See T stock analysis on TipRanks)
The Moderate Buy consensus rating for AT&T is based on 8 Buys, 2 Holds and 2 Sells. The stock has declined about 24% year-to-date (as of August 31). However, the average analyst price target of $34 implies a possible upside of 14% over the next 12 months.
Verizon Communications (VZ)
Verizon has been able to face the pandemic better compared to AT&T as it derives most of its revenue from its wireless business. Like AT&T, Verizon also looked for growth in the media space through the 2015 AOL acquisition and 2017 Yahoo acquisition. However, these acquisitions didn’t meet the company’s expectations and as a result Verizon booked a $4.6 billion impairment charge related to its media business in 2018.
Now, the company is more focused on its telecom operations and is geared to take advantage of the prospects in 5G services. In the first half of 2020, Verizon’s capital expenditure of $9.9 billion was directed toward supporting the capacity for traffic growth and the deployment of additional fiber and cell sites to expand the 5G Ultra wideband rollout. The company aims to reach 60 cities with 5G Ultra wideband mobile services by the end of this year.
In the second quarter, Verizon’s revenue declined 5.1% Y/Y to $30.4 billion due to lower device sales owing to retail store closures. Also, the adjusted EPS fell 4.1% to $1.18. A spike in the use of internet services helped in driving 352,000 retail postpaid net additions, including 173,000 phone net additions and 287,000 postpaid smartphone net additions.
However, total wireless service revenues declined 1.7% to $15.9 billion, reflecting the impact of waived fees and reduced roaming and usage due to travel restrictions.
At the same time, sales from the company’s Media business (includes Yahoo, HuffPost and TechCrunch) plunged 24.5% to $1.4 billion as companies trimmed down their advertising spending. (See VZ stock analysis on TipRanks)
On August 11, Tigress Financial analyst Ivan Feinseth reiterated his Hold rating for Verizon and stated, “While VZ’s current valuation leaves little room for significant upside appreciation, once significant 5G adoption takes place helped by the introduction of new 5G enabled phones, we could see an acceleration of business performance trends in 2021.”
An average analyst price target of $62.30 suggests an upside of 5.1%. The stock has fallen 3.5% so far in 2020. Five Buys, 6 Holds and no Sells add to a Moderate Buy consensus for Verizon.
Conclusion
The 5G roll-out is expected to boost the prospects of both AT&T and Verizon. However, in the current scenario, AT&T is more exposed to pandemic-led headwinds due to its media business.
Despite an array of issues, many investors prefer AT&T for its dividends. AT&T, a dividend aristocrat, has increased its dividends for 35 consecutive years and has a dividend yield of 6.9%. In comparison, Verizon’s dividend yield is 4.2%. About 67% of the analysts covering AT&T have a Buy rating compared to 45% in the case of Verizon.
To summarize, higher upside potential in the stock over the next 12-months, prospects in the streaming space and an impressive dividend yield make AT&T look more favorable right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
