Verizon: Would it Benefit from Bumper iPhone 5 Demand? (VZ, AAPL, T)

PUBLISHED: 28 Sep 2012 @ 02:08 | Comments (21) | More info about Ed Liston

iPhone 5 is a smash hit, as expected and Apple Inc. (NASDAQ:AAPL) is consolidating its position as the biggest company on the strength of this phone. However, let’s take a look at the other stakeholders who have their fortunes tied to this phone.

While AT&T (NYSE:T) has been carrying this phone since its first iteration, Verizon (NYSE:VZ) is a relative newcomer. Verizon is now steadily improving its share of iPhone pie despite the fact it did not prove to be much successful in making AT&T iPhone users to switch to its network. Though, the high switching fee was the main reason behind the sluggish exodus. Apart from this, though iPhone helped Verizon boost its subscribers’ base, it also strained the company’s profit margin. So, now that iPhone 5’ initial figures are out, let’s see how Verizon is going to fare in near future.

Apple released preliminary figures for iPhone 5 and announced that it sold more than 2 million units of the iconic phone in the first 24 hours of pre-orders. The phone sales crossed 5 million mark during its weekend. The phone is on its way to smash all the previous records, but how much of this is going to accrue to Verizon. According to initial estimates, AT&T still maintains its leadership position when it comes to iPhone subscription. So far, Verizon had been responsible for 24 percent of online domestic sales of the phone during the first three days. AT&T captured 68 percent share. However, Verizon still can recreate the story of iPhone 4S, where the company increased its share in online sales from 35 percent to 45 percent.

iPhone partnership has largely been a good news for Verizon. iPhone 4S helped the company to log the fastest service revenue growth in three years for its fiscal first quarter of 2012. Verizon beat the street estimates for subscription for both iPhone 4 and iPhone 4S and is likely to continue the feat with iPhone 5 as well. The new phone uses 4G LTE, upgraded from iPhone 4 and iPhone 4S, which were 3G compatible. Verizon has the advantage of having the most robust 4G LTE network out of all the other major carriers. This feature may help the company attract new iPhone customers. It may also help in poaching the subscribers off AT&T, which has become notorious for its lagging data speed and dropped calls.

However, unlike Apple, where each phone contributes immediately to the bottom line, these carrier companies like Verizon suffer from a major drawback. The higher subscriber base comes at a cost as these carriers heavily subsidize the initial price of the phone and are set to recover the cost over the course of subscription period. Thus, even if Verizon scoops up a large number of iPhone 5 subscribers, the results won’t be immediately visible on its financial statements and thereby on its stock price.

It’s rumored that iPhone 5 will have even tighter margins for the carrier companies. According to Macquarie Securities, Verizon is likely to see about 6 percent point dip in its margin. However, Verizon is expected to make up for the initial hit through its monthly fee growth. Also, with its faster surfing speed, I expect iPhone 5 to lead to higher data consumption, thereby padding the pockets of Verizon. But again, the company is expected to make huge capex on expanding and maintaining its 4G LTE infrastructure. Thus, in the short term, Verizon is set to pay the big price for future gains. However, the company is expected to see the bigger surge early next year, when the 2-year contract period for its first generation iPhone users expire.

Though, I am focusing on iPhone 5’s impact on Verizon, but the stock price is going to be affected by other factors too. Recently Verizon has been hit by $250 million penalty to be paid to TiVo. Both the companies were embroiled in patent infringement litigation and Verizon is now obliged to make initial payment of $100 million in cash to TiVo. Rest of the payment is to be paid through recurring quarterly installments by 2018. However, both the companies agreed to settle all pending cases between them. Tighter margins along with high capex and penalties are likely to weigh down the stock price in short run.

However, in medium to long run, I am bullish about the stock. The stock has shown good growth in this year so far and after dipping in August, it is again back to near its 52 weeks high price level. The stock also has healthy dividend yield ratio of about 4.6 percent. So, while I will be cautious in the short run, the stock is good pick for medium term.

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