To The Moon

$Verizon(VZ)$

$150 Billion Debt

August 1st, 2018 – A celebration is underway at Verizon. Employees are raising their glasses, bidding farewell to CEO Lowell McAdam. Laughter fills the air as colleagues reminisce about his achievements and seven-year leadership. But beneath the cheer, a tense anxiety lingers. Verizon is on a precarious edge, having spent billions on a failed venture. As leadership reflects, one pressing question dominates their thoughts: How do we pay off $150 billion in debt? McAdam departs, leaving Verizon as one of the most fragile telecom companies, with little room for error. How did they reach this point?

Big Plans & Big Bets

Seven years earlier, on the same day, McAdam assumed the helm of Verizon with grand ambitions. His first priority: regaining ownership of Verizon Wireless, the company’s most profitable division. However, 45% of it was owned by Vodafone.

In 2000, when Verizon was still Bell Atlantic, it partnered with Vodafone to create Verizon Wireless. At the time, both companies focused on landlines, making this venture their entry into the mobile market—a rapidly growing industry. By 2011, Verizon Wireless was generating over $70 billion in revenue with an impressive 44.8% EBITDA margin. But Verizon only saw half of these profits. McAdam wanted it all.

In 2013, Verizon struck a deal to buy out Vodafone’s 45% stake for $130 billion. This move secured a colossal revenue stream, with Verizon Wireless reporting $87.6 billion in revenue in 2014, an 8.2% increase from the previous year. But the deal came at a steep cost.

Verizon took out a $61 billion bridge loan and issued a $49 billion bond offering, piling on debt. Yet, emboldened by the acquisition’s immediate success, McAdam made another bold move—one that would backfire spectacularly. In 2015, Verizon acquired AOL for $4.4 billion, followed by Yahoo for $4.5 billion in 2017. His goal? To challenge Facebook and Google in digital advertising.

McAdam believed AOL’s ad tech and Yahoo’s vast user base—over 1 billion active users—could transform Verizon into a digital advertising powerhouse. The two companies merged into Oath, Verizon’s ambitious media division. The plan was grand, but the execution was disastrous.

Expectations vs. Reality

From the start, Oath struggled. Verizon laid off 15% of AOL and Yahoo staff, attempting to streamline operations. Yet, the reality was grim. Oath’s 2017 quarterly revenue stood at $2 billion—minuscule compared to Facebook’s $40 billion and Google’s $95 billion annual earnings.

Advertisers were unwilling to divert their budgets from tech giants like Google and Meta. Oath lacked the necessary data for precise ad targeting, and the digital advertising landscape was shifting. Click-through rates were plummeting, ad spending was moving toward social media, and ad-blocker usage was surging—from 240 million users in 2014 to nearly 700 million in 2018.

Verizon had invested billions into an outdated business model, attempting to compete in an arena already dominated by titans. Worse, their projections were wildly optimistic—aiming for $10 billion in revenue but missing the mark by $8.2 billion.

Recognizing the failure, McAdam announced his retirement in June 2018, less than a year after Oath’s official formation. His aggressive expansion had backfired, leaving Verizon burdened with debt and a failed digital media venture.

Refocusing

In the wake of Oath’s struggles, Verizon’s board appointed Hans Vestberg as CEO. Formerly the CEO of Ericsson and Verizon’s CTO, Vestberg faced an uphill battle. Verizon carried $112 billion in debt, mostly from the Vodafone acquisition, while wireless growth had slowed to 3.9% between 2017 and 2018.

Vestberg had two major objectives: cut costs and refocus Verizon’s future. His first move was to write down Oath’s value by $4.5 billion, acknowledging the failed investment. He then shifted focus to Verizon’s core business—telecommunications.

Instead of costly acquisitions like AT&T’s TimeWarner deal, Verizon took a strategic approach. In 2020, they partnered with Disney+ to bundle streaming services into their mobile plans, significantly increasing customer value without massive acquisitions.

However, Vestberg recognized the real future of telecommunications: 5G. Verizon had lagged behind competitors in 5G deployment, focusing on mmWave technology, which provided high speeds but poor coverage. Meanwhile, T-Mobile had aggressively expanded its 5G network. To catch up, Verizon needed a game-changing move.

In 2021, Verizon participated in the FCC C-Band Auction, securing between 140 and 200 MHz of spectrum—doubling its 5G coverage for 100 million Americans. The cost? A staggering $52.9 billion, pushing Verizon’s total debt to $179 billion.

To ease financial pressure, Vestberg sold Oath (now Verizon Media Group) to Apollo Global Management for $5 billion. While this meant a $4 billion loss, it allowed Verizon to shed a costly distraction and focus entirely on telecommunications.

Verizon Today

By 2024, Verizon reported revenues of $134.8 billion, with net income rising to $17.5 billion—a 51% increase from 2023. Profit margins improved to 13%, up from 8.7%. Despite this, Verizon remains weighed down by debt. With a debt-to-equity ratio of 1.32—the highest in the industry—it will likely carry this burden for decades.

Verizon has stabilized, but challenges persist. While 5G investments were necessary, they added immense financial strain. The company must now navigate a delicate balance—maintaining growth while managing a mountain of debt.

Earning Overview

Verizon Communications Inc. reported robust financial results for the fourth quarter of 2024, exceeding analysts' expectations. The company achieved a consolidated net income of $5.11 billion, or $1.18 per share, on revenues of $35.68 billion. This performance surpassed the anticipated profit of $4.74 billion and revenues of $35.36 billion.

Growth

In terms of subscriber growth, Verizon added a net 568,000 wireless and 408,000 broadband customers during the quarter. This marks a significant increase from the 449,000 wireless and 413,000 broadband subscribers added in the same quarter the previous year.

Looking ahead, Verizon projects a 2% to 2.8% growth in wireless service revenue for 2025, with adjusted earnings per share expected to remain flat or increase by up to 3%. The company also anticipates free cash flow between $17.5 billion and $18.5 billion for the year.

Guidance

Wireless Service Revenue Growth: Verizon expects wireless service revenue to grow between 2% to 2.8% in 2025. Adjusted Earnings Per Share: The company anticipates adjusted EPS to remain flat or increase by up to 3%. Free Cash Flow: Verizon is forecasting free cash flow between $17.5 billion and $18.5 billion for 2025.

These expectations are influenced by ongoing investments in 5G infrastructure and network improvements. However, the company also anticipates higher costs and spending related to its 5G expansion.

Cash Flow

Wall Street analysts are optimistic about Verizon's ability to increase free cash flow over the next few years. They predict that Verizon's free cash flow will grow from $17.7 billion in 2025 to $21.5 billion by 2029. This growth will be fueled by two main factors: first, Verizon's major 5G network investments are mostly behind them, which will lower future capital expenditures. Second, Verizon is working to reduce its massive $120 billion debt, which will result in lower interest expenses and improve profitability.

Verizon (VZ) is projecting free cash flow in the range of $17.5 billion to $18.5 billion for the year 2025. This guidance reflects the company’s ongoing heavy investments in 5G infrastructure, which are expected to have a significant impact on both cash flow and capital expenditures.

In the recent Q4 2024 earnings report, Verizon also noted that the company’s cash flow and profits may remain under pressure due to continued investments, although the company is confident in its long-term strategic plan, especially in 5G.

Looking further ahead, I anticipate Verizon's free cash flow growth will slow down after 2029, with just 2.5% growth forecasted until 2034, and 2% growth from 2035 onward. This slower growth is based on the expectation that Verizon will lose market share to more innovative companies, unless it can find new growth opportunities.

Dividend

Verizon is attracting many passive income investors due to its attractive dividend yield, currently over 6.6%. But the question remains: is Verizon an undervalued dividend stock at its current price? In this analysis, I'll evaluate this using a discounted cash flow (DCF) model.

Valuation

While Verizon may not be as exciting for some investors due to its limited revenue growth potential—especially in saturated markets like smartphones—its high dividend yield remains appealing. There are two primary groups of investors: one that values Verizon for its strong dividend, and another that is concerned about its lack of significant growth opportunities.

When I apply a discount rate of 7.85%, based on Verizon's weighted average cost of capital, I calculate that the total value of Verizon’s operations is $341 billion. After subtracting debt and adding cash, the equity value comes to $172 billion, resulting in an intrinsic value per share of $40.75. With Verizon's stock trading at $40.32, the stock is priced near its fair value.

Although my DCF analysis shows Verizon is fairly valued, this calculation is based on a number of assumptions and estimates. It's important to conduct your own due diligence before making any investment decisions.

McAdam’s bold moves reshaped Verizon, but at a steep cost. The question remains: Will Verizon thrive under its financial weight, or will its past decisions continue to haunt it?

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.