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Verizon vs. AT&T: A Comparison of Dominance in the 5G Era

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Verizon vs. AT&T: A Comparison of Dominance in the 5G Era

Last April, the CEO of AT&T publicly declared the company as one of America’s top investors. However, disappointing Free Cash Flow figures have negatively impacted the stock this year.

The rapid growth of 5G technology and the increasing demand for data have led telecommunication companies to invest heavily in infrastructure upgrades. However, the monetization of these investments remains unclear. With little differentiation in quality among larger carriers like Verizon and AT&T, competition is price-based and profit margins are thin. In fact, since the introduction of 5G in my area, I now pay less than I did for 4G.

Despite these challenges, both Verizon (VZ) and AT&T (T) are viewed as solid investments. Operating within a triopoly market structure allows investors to diversify their portfolios and mitigate the risks associated with competition. Additionally, the stability of revenue and attractive dividend yields make this sector appealing.

When examining financial performance, Verizon has historically executed and adapted better than AT&T, resulting in superior metrics.

Debt

It’s important to consider the accounting methods used by companies when comparing financials. While at first glance, Verizon’s interest expense appears lower than AT&T’s despite having slightly higher debt, a closer examination reveals that both companies capitalize certain interest costs. Verizon capitalizes more of these expenses than AT&T, distorting the figures and metrics related to interest coverage and capital costs.

Adjusting for capitalized interest, the difference in interest rates and debt between the two companies becomes minor. Verizon’s slightly higher credit rating also contributes to its favorable interest coverage ratio.

Restructuring

In response to the demands of 5G deployment, both Verizon and AT&T have undergone significant restructuring over the past two years. AT&T spun off WarnerMedia and divested a portion of DirectTV, while Verizon sold its media arm including Yahoo and AOL. VZ has executed these changes more smoothly, as evident in their comparative EBITDA margins.

Both AT&T and Verizon consistently maintain low churn rates compared to T-Mobile, with Verizon historically having a slight advantage. However, AT&T has made notable improvements in recent years, narrowing the gap between the two companies. This may explain why AT&T’s management remains in place despite disappointing financial results and stock performance, while Verizon is undergoing a leadership transition.

Cash Flows and CAPEX

Verizon and AT&T differ in their approaches to 5G deployment. Verizon prioritizes high-band mmWave spectrum, offering high speeds but limited range, while AT&T pursues a more diverse spectrum strategy, balancing speed and coverage. Both companies faced significant expenses due to the FCC’s allocation of mid-band spectrum in 2021. VZ invested $45 billion in securing C-Band waves, while AT&T spent $23.5 billion in the same auction.

As the peak spending phase concludes, both companies are focused on increasing Free Cash Flow. Verizon expects to spend approximately $18.5 billion in capital expenditures this year, while AT&T estimates $24 billion. AT&T’s higher capex requirements are driven by their reliance on fiber networks, which requires physical groundwork. In contrast, Verizon leverages Fixed Wireless Access technology for more efficient coverage in remote areas.

Legal Challenges

Both AT&T and Verizon face legal challenges related to the existence of legacy cables leaking lead into the soil and water. While both companies emphasize adherence to protocols, the lack of clear governmental guidance creates uncertainties. Compliance with protocols may help in criminal lawsuits, but in civil courts, companies may still face tort lawsuits claiming negligence. The full impact of this lead cables controversy on the sector’s investment outlook is yet to be determined.

Summary

As the race for 5G dominance settles, Verizon and AT&T have demonstrated their strategic strengths and weaknesses. While AT&T’s extensive investments and diversified spectrum approach highlight their commitment to broader service, Verizon’s focused strategy could be advantageous as 5G applications expand. Both companies face the challenge of monetizing their investments in a price-based competition environment. However, Verizon’s superior financial metrics and strategic choices position it as the preferred choice. It’s important to recognize that the lead cables controversy poses significant risks and may impact the sector’s investment outlook in the coming years.