Verizon trades at $44.98 and has moved in lockstep with the market. Its shares have returned 7.9% over the last six months while the S&P 500 has gained 10%.
Is there a buying opportunity in Verizon, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Verizon Will Underperform?
We’re swiping left on Verizon for now. Here are three reasons why there are better opportunities than VZ, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Verizon grew its sales at a weak 1.4% compounded annual growth rate. This fell short of our benchmarks.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Verizon has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 14.9%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Verizon’s ROIC averaged 1.8 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Verizon, we’ll be cheering from the sidelines. That said, the stock currently trades at $44.98 per share (or a forward price-to-sales ratio of 1.4×). The market typically values companies like Verizon based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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