In this article, I have evaluated prominent telecom stocks, Verizon Communications Inc. (VZ) and InterDigital, Inc. (IDCC), to determine which stock to invest in. After thoroughly evaluating these stocks, I think while IDCC could be a solid buy, waiting for a better entry point for VZ could be ideal for the reasons discussed in this article.
Rising spending on the deployment of 5G infrastructures due to the shift in customer inclination toward next-generation technologies and smartphone devices is driving growth in the telecom industry. Also, the global communication network has undoubtedly been one of the prominent areas for continued technological advancements over the past few decades.
As a result, the global telecom services is expected to expand at a CAGR of 6.2% until 2030.
Furthermore, as users increasingly demand faster and more reliable connectivity, telecom operators need to leverage cloud technologies to efficiently manage and scale their networks, ensuring seamless connectivity and a superior user experience. Therefore, the telecom cloud market is anticipated to grow at a CAGR of over 19.5% until 2032.
While VZ has declined 4.8% over the past month as compared to IDCC’s marginal gain, VZ also gained 14.3% over the past nine months compared to IDCC’s 28.4% gain.
Therefore, here are the reasons why I think IDCC might perform better in the near term:
Recent Developments
On February 29, 2024, VZ recently teamed with the U.S. military in a training exercise to ensure its people and assets are prepared for rapid recovery efforts when critical communications need to be restored during natural disasters. For the first time, VZ’s Response Team worked alongside the Air Force, Mississippi National Guard and Mississippi Emergency Management Agency (MEMA) in a six-day training that took place in and around Camp Shelby in Hattiesburg, Miss.
Conversely, on February 13, 2024, IDCC and Broadpeak (Euronext Growth: ALBPK), a global leader in CDN and advanced video streaming solutions, announced a collaboration to develop content delivery networks capable to stream MPEG Visual Volumetric Video-based Coding (V3C) immersive content at scale.
Recent Financial Results
In the third quarter ending September 30, 2023, VZ reported total operating revenues of $33.34 billion. The company’s total operating expenses declined 1.8% year-over-year to $25.86 billion. Its net income and net income attributable to VZ stood at $4.88 billion and $1.13, respectively. As of September 30, 2023, its total assets amounted to $384.83 billion, compared to the total assets of $379.68 billion as of December 31, 2022.
On the contrary, during the fourth quarter that ended December 31, 2023, IDCC’s revenues came in at $105.52 million. The company’s adjusted EBITDA amounted to $53.30 million. In addition, the company’s non-GAAP net income came in at $37.50 million, or $1.41 per share.
Past And Expected Financial Performance
VZ’s revenue has increased at a CAGR of 1.5% over the past three years. Its revenue is expected to increase 1.5% in the year ending December 2024 and 1.5% in the first quarter ending March 2024. Its EPS is expected to be $1.12 in the current quarter ending March 2024 and $1.15 in the second quarter ending June 2024.
Conversely, IDCC’s revenue has increased at a CAGR of 15.3% over the past three years. Its revenue is expected to increase 15.5% in the year ending December 2024 and 6.5% in the first quarter ending March 2024. Its EPS is expected to be $7.73 in the year ending December 2024 and $3.35 in the first quarter ending March 2024.
Valuation
VZ’s forward EV/EBITDA multiple of 7.11 is lower than IDCC’s 7.65. VZ’s forward EV/Sales multiple of 2.55x is lower than IDCC’s 3.70x.
Profitability
VZ's trailing-12-month gross profit margin of 59.09% is lower than IDCC’s 86.92%. In addition, VZ’s trailing-12-month EBIT margin of 22.59% is lower than IDCC’s 41.70%.
Thus, IDCC is more profitable.
POWR Ratings
VZ has an overall rating of C, translating to a Neutral, in our proprietary POWR Ratings system. Conversely, IDCC has an overall rating of B, which equates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VZ has a C grade in Quality. Its trailing-12-month levered FCF of 7.05% is 7.1% lower than the industry average of 7.59%. However, its trailing-12-month gross margin of 59.09% is 20.1% higher than the 49.20% industry average.
On the other hand, IDCC has a B grade in Quality. Its trailing-12-month gross profit margin and trailing-12-month levered FCF margin of 86.92% and 35.86% are 77.8% and 309.3% higher than the industry averages of 48.88% and 8.76%.
Moreover, VZ has a C in Value. Its forward non-GAAP PEG of 5.46x is 268.6% higher than the industry average of 1.48x. However, its forward EV/EBITDA multiple of 7.11 is 11% lower than the industry average of 7.98.
In contrast, IDCC has a B grade for Value. IDCC’s forward non-GAAP PEG of 1.32x is 36% lower than the industry average of 2.06x. Its forward EV/EBITDA multiple of 7.61 is 50.9% lower than the industry average of 15.51.
Among the 16 stocks in the Telecom - Domestic industry, VZ is ranked #6, while IDCC is ranked #3.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Sentiment Momentum, and Growth. Get all VZ ratings here. Click here to view IDCC ratings.
The Winner
The telecommunications sector stands at a crest of significant transition, fueled by innovative technologies and evolving consumer demand. Industry players such as VZ and IDCC are well-positioned to benefit from these industry tailwinds.
However, VZ's lower profitability makes its competitor IDCC, the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Telecom - Domestic industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
IDCC shares were trading at $107.42 per share on Friday afternoon, up $0.40 (+0.37%). Year-to-date, IDCC has declined -0.66%, versus a 7.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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