Insights

Why Verizon Communications Shares Lost 9% in July

What happened

Shares of Verizon Communications (NYSE: VZ) fell 9% in July 2022, according to data from S&P Global Market Intelligence. By contrast, the S&P 500 market index rose 9.1% in the same period, leaving Verizon investors far behind.

So what

The bulk of Verizon’s market pain last month sprung from a disappointing second-quarter report. Big Red fell slightly short of Wall Street’s earnings estimates while meeting revenue expectations with a completely flat year-over-year comparison.

More to the point, Verizon’s subscriber addition figures didn’t impress anybody. The company added just 12,000 postpaid wireless subscribers in the second quarter, along with 36,000 net new Fios internet customers. In comparison, the telecom added 878,000 postpaid wireless customers and 92,000 Fios accounts in the year-ago period.

Now what

Verizon’s sluggish subscriber growth was a result of weak consumer demand for wireless phones and high-speed data services. This is an ongoing trend that Verizon’s management has been referencing in the last three earnings reports, but it has not found a successful antidote to this core issue. And that’s not the whole story.

“The inflationary environment is clearly impacting consumer behavior, and we also saw intensified competition for consumer attention,” CEO Hans Vestberg said on the earnings call. In other words, on top of the inflation-based market challenge, Verizon is losing subscribers to the competition.

Verizon’s knee-jerk reaction to weak subscriber additions has been to raise consumer prices — a move that isn’t particularly effective when it comes to finding new customers. This trend reminds me of the movie industry, where theaters and studios have been fighting lower ticket sales with higher prices over the last couple of decades. It shouldn’t come as a surprise when these price increases fail to ignite an impassioned surge in customer growth. In this way, the telecom market looks a lot like Hollywood.

All of this is to say I’m not surprised to see subscribers staying away from Verizon’s rising prices. The company is trying its hand at less expensive promotions, but it’s the long-term costs that need to be adjusted here. Don’t forget that Verizon is a hyperefficient cash machine, generating $17.7 billion of operating cash flows in the first half of 2022. The telecom company can easily afford to slow its cash-profit roll for a while if it wants to get back to robust subscriber growth. I think that’s a good idea.

Until that happens, I’m not a Verizon buyer. Let’s just say I’m not holding my breath while waiting for a lower-priced sales strategy here.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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