Keybanc Capital Markets analyst Brandon Nispel has downgraded Verizon Communications (VZ) stock from Overweight to Sector Weight, signaling a less optimistic outlook for the telecommunications giant. The downgrade comes on the heels of Verizon’s recent earnings report, which Nispel deemed weaker than expected. While his overall outlook for Verizon remains largely unchanged, Nispel adjusted his rating based on several key factors.
One major concern is Verizon’s limited EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) growth potential. Nispel projects a modest 1.5% increase in 2025, significantly lower than the anticipated 2.2% growth in 2024. This sluggish growth trajectory, coupled with a projected decline in free cash flow, has weighed on the analyst’s confidence.
Nispel also expressed concern about Verizon’s acquisition of Frontier Communications Parent, Inc (FYBR), which he believes was a poor capital allocation decision. He argues that the deal will restrict Verizon’s ability to repurchase shares in the near term, a strategy he considers a more favorable use of capital. Furthermore, the Frontier acquisition is expected to offer a relatively modest internal rate of return of 6%, but carries significant risk.
Another factor contributing to Nispel’s downgrade is the increasing cost of growth for Verizon’s postpaid phone business. While the company has transitioned from negative to positive net additions, device subsidies have risen considerably. This indicates that achieving growth is becoming more expensive, potentially impacting profitability.
Despite the downgrade, Nispel maintained Verizon’s 2024 guidance, projecting 2.0%-3.5% year-over-year wireless service revenue growth and 1.0%-3.0% adjusted EBITDA growth. He expects results to hit or exceed the midpoints of this range. Capital spending guidance remains at $17.0 billion-$17.5 billion. However, for 2025, he anticipates decelerating wireless revenue growth, lower EBITDA growth of around 2%, and a decline in free cash flow due to increased capital spending and taxes.
Nispel’s fair value estimate for Verizon is $42, reflecting a multiple of 6.5 times his 2025 adjusted EBITDA estimates. This is slightly higher than the industry average of 6.4 times for cable companies but lower than the average of 7.4 times for telecoms.
In terms of financial projections, Nispel expects fourth-quarter revenue of $35.36 billion and EBITDA of $11.98 billion. For fiscal 2024, he projects revenue of $134.47 billion and EBITDA of $48.85 billion. Looking ahead to fiscal 2025, he anticipates revenue of $136.36 billion and EBITDA of $49.6 billion.
As of Thursday, VZ stock was down 2.48% at $41.80. The stock has experienced a decline of nearly 5% over the past five days. This downward trend reflects investor sentiment surrounding the concerns highlighted by Nispel and the potential impact on Verizon’s future performance.
