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Wondering if Verizon Communications, at around $40 a share, is quietly turning into a value opportunity, or is just another earnings trap in your portfolio? Let’s take a look at what the market is really pricing.
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Despite only modest gains of about 3.0% last month and 2.2% last year, the stock remains well below where it was three years ago, when it fell about 33.9%, suggesting investors remain cautious about its long-term growth.
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Recently, attention has returned to Verizon as it ramps up investments in its 5G network and continues to roll out premium unlimited data plans, both of which are designed to support more stable long-term cash flow. At the same time, ongoing debates over telecom competition and capital intensity have tempered overly optimistic expectations.
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Verizon scores a 4 on our list of six valuation tests, indicating that it is undervalued by most metrics and deserves a closer look, not just with traditional valuation models, but also with a more nuanced look, which we’ll return to at the end of this article.
Find out why Verizon Communications’ 2.2% return last year lagged its peers.
Discounted cash flow models estimate the value of a business by projecting the cash it can generate in the future and then discounting those cash flows to today using a required rate of return.
For Verizon Communications, the model starts with trailing 12-month free cash flow of approximately $17 billion and applies a 2-stage free cash flow to equity framework. Analysts have made clear predictions for the next few years, and Simply Wall St extrapolates further, including forecasting free cash flow of about $28.1 billion by 2035. These future cash flows are then discounted to reflect risk and the time value of money.
Adding up all the discounted cash flows and dividing by the number of shares, the estimated intrinsic value is about $107.41 per share, compared with the current price of about $40. This gap means the stock trades at a discount of approximately 62.1% to its DCF-based value. This suggests that the market is pricing in much weaker cash flow durability than the model assumes.
Result: Undervalued
Our discounted cash flow (DCF) analysis shows that Verizon Communications is 62.1% undervalued. Track this stock in your watch list or portfolio, or discover 907 undervalued stocks based on cash flow.
Please see the Valuation section of our corporate report for more details on how we arrived at Verizon Communications’ fair value.
For a mature, profitable company like Verizon Communications, the P/E ratio is a useful measure of how much investors are willing to pay for each dollar of current profits. Generally speaking, faster growth and lower perceived risk justify a higher P/E ratio, while slower growth or higher risk tends to pull down a normal or fair P/E ratio.
Verizon currently trades at about 8.6 times earnings, which is very similar to its peers’ average of about 8.5 times and significantly lower than the broader telecom industry average of about 16.2 times. Simply Wall St also calculates Verizon’s fair ratio of approximately 13.9x, a proprietary estimate of its price-to-earnings ratio after taking into account its earnings growth prospects, margins, industry, market capitalization and specific risks.
This fair ratio is more informative than a simple comparison to peers or the industry because it adjusts for Verizon’s own fundamentals rather than assuming that all telecom companies should earn the same multiple. The current price-to-earnings ratio of 8.6x is well below the fair ratio of 13.9x, suggesting that Verizon is undervalued based on multiple perspectives.
Result: Undervalued
P/E ratios tell a story, but what if the real opportunity lies elsewhere? Learn about 1,442 companies where insiders are betting big on explosive growth.
Earlier we mentioned that there was a better way to understand valuation, so let us introduce you to Narratives, a simple way to connect your story about a company to the numbers you expect it to deliver, by tying your view of Verizon Communications’ future revenue, earnings, and profits to financial projections and then to fair value that you can easily compare to the current stock price.
Narratives on the Simply Wall St community page used by millions of investors turns it into an easy-to-use tool that lets you select or create a scenario for Verizon Communications, see the resulting fair value, and quickly decide whether that Narrative recommends buying, holding, or selling at the current market price.
The narrative is also dynamic, automatically updating as new information such as earnings, news, or guidance becomes available. For example, an investor might follow a more optimistic narrative that is consistent with a higher analyst target of around $58. Another investor might prefer a more cautious narrative with a lower target closer to around $42. Each investor can use the same framework but act differently based on his or her own view of where the Verizon Communications story actually plays out.
Do you think there’s more to the Verizon Communications story? Head over to our community to see what others are saying!
This article from Simply Wall St is general in nature. We only use unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
Companies discussed in this article include VZ.
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