VZ vs. AAPL
Yes, it’s true. Over the past three months, VZ is up 10.7% while AAPL is flat and the S&P 500 is down 4.2%. We should toss in another 50bp to VZ’s outperformance because it has a high dividend.
Maybe there’s nothing to this. After all, the stock market is, even at its best, a two-steps-forward, one-step-back affair. So VZ could be having one of its forward steps while AAPL is temporarily in reverse. The period in question is very short. The overall market is also down over the past quarter, the kind of environment that favors more defensive stocks. And, of course, VZ and AAPL were neck and neck through the first half of last year before AAPL rocketed ahead and left VZ in the dust.
Still, there may be something a little more substantial going on. I don;t mean to argue that AAPL will be an underperformer. The surprise may be that VZ continues to be an outperformer. I may be biased here, too. I haven’t finished my research yet, but I have recently bought some VZ.
the argument for VZ
the US cellphone market is maturing
According to Nielson, 69% of current cellphone purchasers in the US are buying smartphones. If we break that out by age, close to 80% of new phone purchases by Americans under 55 years of age are smartphones. About half of those 55 or older are choosing smartphones, too.
Given that there will be some–mostly 65+–users who will never adopt new technology, can it get much better than this? I don’t think so.
strategy shift in maturing markets
In a recurring subscription business, the winning tactic in any new market is usually to stake out as much territory for yourself as possible, without much regard for profitability. You don’t care what anyone else is doing. You just want to get as many clients in the door as you can.
As the market matures, however, two changes occur:
–growth comes from taking customers away from competitors, not from finding people who have never used the service before. This is typically harder work and more expensive, so firms with scale end to have an advantage.
–profitability becomes more important. Firms try to raise prices and to cut operating costs.
I think this is where we are in the US cellphone market.
sources of profit growth for VZ
1. lowering phone subsidies. To use round numbers, let’s say VZ pays AAPL $600 for an iPhone 4s. It resells the phone, linked to a two-year contract, to a customer for $200. VZ loses $400 on the transaction.
If the company can persuade that customer to choose an Android phone that it pays, say, $450 for, it loses $250 instead. So it’s $150 better off. That’s all incremental profit.
Better (for VZ) still, if the customer chooses a Nokia Lumia phone, the loss may be only $200.
In Europe, phone companies are experimenting with using INTC reference designs to make house-branded phones. Why bother? INTC is only interested in selling chips, so it is ceding the entire wholesale markup to the carrier. So it may cost the carrier $350 for a phone it can resell for $200–meaning a loss of $150.
Make this sort of marketing shift for enough customers and the savings become significant, even for a company of VZ’s large isze.
2. raising prices. In a sign that VZ thinks its market is maturing, it is fundamentally reworking its pricing. Starting late this month, customers will get voice for free but begin to pay for data. No more all-the-data-you-can-use plans, either. Interestingly, VZ is going to eliminate a $20 per month charge for the ability to make your phone a mobile “hot spot” for internet access. So you can tether your laptop or tablet to your phone for free, just by asking VZ politely. Why? Videos look a lot better on a tablet. And they’re very data intensive.
all good things end, someday
At some point, possible profit-enhancing measures will run their course. But that’s probably several years down the road. In the meantime, VZ’s profit performance vs.Wall Street expectations may be surprisingly good.
In a perfect world (for the holder of VZ shares), the company would be able to spin off or otherwise shed its fixed line and FIOS money pits. For stockholders, that would be like hitting the lottery. It’s very highly unlikely to happen, in my opinion. But, on the other hand, there’s nothing in the stock price for the possibility.