Shares of Verizon (NYSE: VZ), the second largest telecom company in the US, declined early Monday after Citi downgraded the stock to neutral from buy while retaining the price target at $62. The impact of the rating action on investors’ sentiment was moderate because the brokerage maintained its positive outlook on the company’s second-quarter report, which is due on August 1.
Announcing the revised rating, Citi cautioned that Verizon might find difficulty in maintaining the current momentum if it restricts its focus and growth initiatives to the wireless category.
The changed operating conditions in the telecom industry, which is witnessing a consolidation wave, will continue to set new equations in terms of pricing and competition. The emerging scenario will also give rise to new risks, prompting investors to be more cautious while dealing in telecom stocks.
The main challenge facing legacy telecom firms like Verizon will be diminishing expansion opportunities and pricing freedom in the wireless space, especially in the wake of the proposed mega-merger between T-Mobile (TMUS) and Sprint (S). New competitors with better pricing power will add to the problem, leveraging the declining establishment costs due to technological advancements. The analyst is of the view that telecommunication companies could be entering an era of low margins.
The research firm went one step further and recommended that Verizon’s management should consider acquiring Dish Network (DISH) so that it can use the latter’s expansive wireless spectrum to scale up growth.
In the first quarter, Verizon’s earnings rose 3% to $1.20 per share and topped the Street View. Though revenues rose modestly to $32 billion, they missed the estimates.
Verizon shares made steady gains in the last twelve months and have been hovering near the record highs seen about two decades ago. The stock, which has moved up 13% since the beginning of the year, lost about 1% in Monday’s early trading hours.
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