Verizon: Amazon Hangover Creates A Bargain Buy

Verizon Communications Inc. (NYSE:VZ) investors endured a torrid week, as negative sentiment from Amazon (AMZN) potentially entering the wireless market spooked investors.

I assessed that VZ buyers failed to return before last week's tumble. However, buyers returned toward the end of the week, as VZ finished robustly off the lows. While still early, the current week's price action shows that the selling pressure has abated, suggesting that VZ dip buyers are likely holding on firmly.

But does it make sense? Amazon's entry into the wireless market could trigger "black swan" risks, which could unhinge the economics of Verizon. With net debt rising to $183B at its recent earnings release, Verizon could struggle to cope with an increasingly competitive wireless market if a tech behemoth like Amazon decides to enter.

Despite that, I think investors must consider that Amazon denied it's entering the wireless market "at this time." Hence, I think it's clear that Amazon didn't categorically rule out an entry, suggesting that investors were right to reflect uncertainties.

However, I think it's important to note that the growth of 5G could have moved past its earliest "deployment" stage, as Verizon CEO Hans Vestberg highlighted in a recent conference in May.

He stressed that we are in the "innovation" phase of the 5G era, as more "new applications are being developed." As such, the company is confident that we could see newer enterprise and consumer use cases moving ahead, "characterized by more innovation and advancements."

In addition, Morningstar highlighted that we are not likely to see the major telcos making "irrational" decisions to compete for business by opening up the market to Amazon. It argued that "the emergence of parity" should help to discourage the leading incumbents from "chasing market share."

However, it highlighted that the wholesale market could present a challenge, as it could "tempt carriers to make ill-advised decisions to benefit from Amazon's disruption."

Of particular note is DISH Network (DISH). The risks of Dish needing more funding and support could lead the company to "strike a poor deal with Amazon out of desperation." As such, it could open up an opportunity for Amazon to enter the wireless business.

However, that risk is likely mitigated by Dish's current business model, which remains limited in coverage compared to the leading networks. MoffettNathanson argued in a recent commentary that there is "virtually no chance that Amazon would risk being a guinea pig on a start-up Dish wireless network."

Furthermore, Dish's limited coverage with services in just 120 cities could affect the appeal of an Amazon partnership. Also, its reseller agreements likely "don't allow Dish to resell access to a third party, such as Amazon."

As such, I parsed the near-term risks of an Amazon partnership affecting VZ's business model as relatively contained. Furthermore, VZ isn't priced at a significant premium at the current levels, suggesting considerable pessimism has likely been priced in.

Seeking Alpha's Quant rated VZ's valuation with an "A-" grade, indicating it's attractive. I also gleaned that VZ's forward EBITDA multiple of 6.9x is below its 10Y average of 7.1x.

Furthermore, I gleaned that the selling pressure was defended by dip buyers last week, as VZ's price action suggests a consolidation could follow. While still early, I assessed that VZ's valuation and oversold levels seemed attractive for buyers waiting patiently for a steep selloff before adding.

However, I believe it's essential for investors to consider that the potential risks of a subsequent Amazon entry cannot be ruled out. HSBC (HSBC) analysts cautioned that "Amazon is unlikely to categorically rule out the option of offering mobile services to Prime subscribers."

As such, the specter of aggressive price competition and market share dilution cannot be ruled out if Amazon decides to enter. Unfortunately, that hangover could trouble VZ's potential recovery for some time, as buyers anticipate more positive developments before returning to support VZ's relatively attractive valuation.

With that in mind, investors considering adding now need to remain patient and closely analyze the developments over Amazon's wireless ambitions.

Rating: Buy (Reiterated).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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