What's Up With Verizon's Stock? It's A Buy On Telecom Giant's Bold Digital/Mobile Strategy.

The unexpected decision by Verizon Communications (VZ) to acquire AOL (AOL) grabbed instant attention worldwide, but Wall Street was, well, underwhelmed. Many lauded the deal as a necessary move to shift Verizon’s focus towards a “digital strategy” as a way of acquiring an advertising platform to broaden its reach in mobile services.

Shares of Verizon, however, have yet to react positively. But that’s where opportunity lies, according to some big Verizon stakeholders, as they believe the stock has now become more undervalued. 
Even as Verizon wants to leverage its assets, the agreement to buy AOL, as bold and opportunistic as it is, hasn’t spurred excitement among Street analysts. There hasn’t been any rush to upgrade their ratings nor boost price targets on shares of the largest U.S. wireless carrier. And although many analysts believe it’s the right thing to do, shares of Verizon has sagged to $49 a share since the deal was announced, off from a 52-week high of $53.66.
Clearly, Verizon is “making an earnest attempt to build the right suite of assets,” says Amir Roswadowski, analyst at Barclays Capital, in order to ensure that “all the bricks are in place to build a solid foundation for a mobile video distribution strategy that can ultimately add to the company’s top and bottom line.” But the analyst is sticking to his “equal weight” or neutral rating on Verizon, and also leaving unchanged his price target of $52 a share.
 AOL seems to provide “the latest piece of the puzzle on how Verizon may look to monetize its strategy designed to capitalize on the rapidly growing trends in mobile broadband and content consumption,” says Roswadowski in a recent note to clients. “We look for further color in the coming months.”
S&P Capital IQ analyst Angelo Zino is also staying with his “hold” recommendation and price target of $52 a share on Verizon, even as he expects the Verizon/AOL transaction will likely “help expand the company into two key areas – mobile and video.” He notes that the combination of Verizon and AOL fits in with Verizon’s “over-the-top strategy and the consumer shift towards his arena.” Zino says he likes AOL’s digital content brands, which includes the Huffington Post and TechCrunch.
So why not upgrade his rating on Verizon? He explains that his hold recommendation still “reflects growth prospects, valuation, and a challenging industry landscape.” But Zino notes that Verizon’s dividend yield, which is close to 4,5%, provides support for the shares.                  
And some analysts believe AOL wouldn’t have a large contribution to Verizon’s bottom line. While AOL’s impact on Verizon’s foray in digital advertising and its revenue-per-subscriber remain to be seen, “it is important to understand that it is likely to remain a very small component in the near term,” investment research firm Trefis points out. For perspective, it notes that AOL is currently less than 2% of Verizon in terms of market cap and overall revenues.
Trefis notes that Verizon’s primary focus is on “AOL’s rapidly expanding programmatic ad offerings, which are likely to open new avenues of revenue generation going forward.” The acquisition of AOL, says the research firm, will enable Verizon to integrate AOL’s content programming and target advertising technology with its massive wireless network.
One key factor that influenced Verizon’s move on AOL is to enable it to monetize the rapidly growing consumption of online content on mobile devices. Trefis describes this as both as an opportunity and a challenge. “AOL’s revenues grew over 100% in the first quarter,” notes Trefis, and still has “significant upside to this considering that a large proportion of the company’s mobile inventory currently does not show ads.”
Morgan Stanley analyst Simon Flannery notes that the principal interest in the agreement with AOL, scheduled to close this summer, is around the advertising tech platform. He notes that Verizon sees AOL’s technology “a key enabler to generate revenue and value above the network layer.” Flannery, who rates Verizon as “overweight,” points out that while it’s surprising to see Verizon acquire a content company after focusing on content delivery, the acquisition of an advertising platform appears to be consistent with the broader strategy around monetizing mobile video consumption.
With Verizon’s stock languishing in the $49-$50 range, the stock should attract long-term investors for the company’s pursuit of a broader reach into the digital world. Over the next 12 months, when more of the AOL’s positive impact on Verizon becomes more visible, it would be reasonable to expect that Wall Street will adjust its outlook for the stock by then towards a more upbeat forecast, as analysts start to upgrade their recommendations.
Right now, analysts’ expectations for the stock isn’t quite high, ranging from $52 to $58. But some large investors see the stock rising above the $60-a-share level over the next 12 months.
One reason for the current lack of excitement on Wall Street over the Verizon-AOL deal is the lack of visibility in terms of its financial impact. “We believe the acquisition could have more strategic impact than financial,” says David B. Burks, analyst at investment firm Hilliard Lyons. Verizon hasn’t disclosed whether the transaction would be accretive or not.
“Our sense is that it will not have a material impact on earnings,” says Burks. “Where the deal could have the most potential, in our view, is with advertising technology.”  The move could help Verizon increase its advertising efforts with both mobile and digital applications, argues Burks. He is maintaining his buy rating on Verizon as he believes the AOL purchase could help strategically. In all, he expects Verizon to generate steady earnings and dividend growth.  
“We regard Verizon as a good quality core telecom holding for investors seeking both capital appreciation and rising dividend income,” says Burks in a note to clients. And although competition will likely remain a challenge, he adds, “Verizon remains the nation’s largest wireless carrier with a strong network and the highest margins.”

forbes.