Better Buy: Verizon vs. T-Mobile

Verizon Communications Inc. (VZ) offers communications, technology, information, and entertainment products and services worldwide to consumers, businesses, and governmental entities. The New York City company has approximately 27 million wireless retail postpaid connections and 477,000 wireline broadband connections. In comparison, T-Mobile US Inc. (TMUS) in Bellevue, Wash., provides mobile communications services in the United States, Puerto Rico, and the United States Virgin Islands. The company offers voice, messaging, and data services to 108.7 million customers in the postpaid, prepaid, and wholesale markets.

Telecommunication has been in high demand as the need for advanced connected technologies increased amid the COVID-19 pandemic, with people spending most of their time at home. In addition, with the resurgence of COVID-19 cases in China and other parts of the world, telecom services are expected to continue witnessing increasing demand as hybrid working is likely to dominate in the near term. Moreover, rising expenditure on the deployment of 5G infrastructures due to the shift in customer demand toward next-generation technologies and smartphone devices is driving the telecom industry’s growth. According to a report by Grand View Research, the global telecom services market is expected to grow at a 5.4% CAGR by 2028. Therefore, both VZ and TMUS should benefit.

TMUS stock has gained 6.9% in price over the past six months, while VZ has negative returns. Also, TMUS’ 9.1% gains year-to-date compared to VZ’s negative returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On May 5, 2022, VZ announced a dedicated strategy specifically designed for stadium and venue customers in Europe and the Asia-Pacific region. This new strategy leverages the company’s innovative private 5G technology, its extensive industry expertise, and critical new technology partnerships.

On May 17, 2022, TMUS kicked off its T-Mobile Accelerator program working with startups, developers, and entrepreneurs to build immersive experiences for AR smart glasses using T-Mobile 5G and the Snapdragon Spaces XR Developer Platform. John Saw, EVP of Advanced & Emerging Technologies at TMUS, said, "Smart glasses will completely change how we connect and experience the world around us."

Recent Financial Results

VZ’s revenues increased 2.1% year-over-year to $33.60 billion for its fiscal first quarter, ended March 31, 2022. However, its net income came in at $4.70 billion, representing a 12.4% year-over-year decrease. Also, its EPS was  $1.09, down 14.2% year-over-year.

TMUS’ revenues increased 1.8% year-over-year to $20.12 billion for its fiscal first quarter, ended March 31, 2022. However, its net income was  $713 million, representing a 23.6% year-over-year decrease. Also, its EPS came in at $0.57, down 23% year-over-year.

Past and Expected Financial Performance

VZ’s revenue and total assets have grown at CAGRs of 0.8% and 8.8%, respectively, over the past three years. Analysts expect VZ’s revenue to increase 2.4% in fiscal 2022 and 2.1% in fiscal 2023. The company’s EPS is expected to grow 0.4% in fiscal 2022 and 2.8% in fiscal 2023. Furthermore, its EPS is expected to grow at 3.6% per annum over the next five years.

In comparison, TMUS’ revenue and total assets have grown at CAGRs of 22.4% and 36.4%, respectively, over the past three years. The company’s revenue is expected to increase 1.4% in its fiscal 2022 and 2.7% in fiscal 2023. Its EPS is expected to grow 14.1% in fiscal 2022 and 125.1% in fiscal 2023. Also, TMUS’ EPS is expected to grow at a 58.7% rate per annum over the next five years.

Profitability

VZ’s trailing-12-month revenue is 1.67 times what TMUS generates. VZ is also more profitable, with a gross profit margin and net income margin of 57.46% and 15.93%, respectively, compared to TMUS’ 57.11% and 3.48%, respectively.

Furthermore, VZ’s ROE, ROA, and ROTC of 27.81%, 5.06%, and 6.91%, respectively,  are higher than TMUS’ 4.11%, 3.19%, and 3.66%.

Valuation

In terms of forward non-GAAP P/E, TMUS is currently trading at 51.18x, which is 464.3% higher than VZ’s 11.74x. And  TMUS’ 3.31x forward EV/S ratio  is 17.8% higher than VZ’s 2.81x.

So, VZ is relatively affordable here.

POWR Ratings

VZ has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, TMUS has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Among the 21 stocks in the Telecom - Domestic industry, VZ is ranked #5. In comparison, TMUS is ranked #11.

Beyond what I have stated above, we have also rated the stocks for Growth, Value, Momentum, Quality, Stability, and Sentiment. Click here to view all the VZ ratings. Also, get all the TMUS ratings here.

The Winner

The telecom market is expected to grow with increasing demand for technology-based solutions to facilitate hybrid working. While both VZ and TMUS are expected to gain, we think it is better to bet on VZ now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Telecom - Domestic industry here.

VZ shares rose $0.03 (+0.06%) in after-hours trading Tuesday. Year-to-date, VZ has declined -3.52%, versus a -13.76% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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