The advent of artificial intelligence (AI) has led to many companies claiming AI capabilities. Although not all of these are worthy AI investments, says telecom giant Verizon Communications(NYSE: VZ) could be an overlooked AI stock.
AI dear Nvidiafor example, saw its shares rise more than 130% in the past twelve months. Meanwhile, Verizon shares hit a 52-week low of $37.59 on Jan. 10, and they remain near this low.
But how is Verizon contributing to the expansion of the AI market? Is it a purchase while the share price has fallen? Let’s dive into the company to answer these questions.
Verizon is contributing to the growth of the AI sector through its 5G wireless network. The 5G service supports the high speeds and security needed to deliver AI to devices at the edge of a computer network, such as laptops and mobile phones.
An example of Verizon’s role in AI edge computing is its partnership with Nvidia to deliver AI to private networks, which are wireless services for specific organizations. For example, Verizon will provide a private network to FIFA for the 2026 Men’s World Cup.
According to CEO Hans Vestberg, “As we expand our 5G Ultra Wideband network and scale our private network operations, we open new opportunities for growth and innovation.”
By bringing AI to the edge, Verizon can do just that. That’s because the AI edge computing sector is expected to grow tenfold, from $27 billion in 2024 to $270 billion in 2032. Delivering AI at the edge is critical to fueling the growth of self-driving cars, robotics and the internet of things to facilitate.
The company currently generates revenue from its wireless services. In the third quarter, this part of Verizon’s business generated $19.8 billion in revenue, up 3% year over year.
The growth of the AI edge computing industry is a promising tailwind for Verizon’s revenue. However, other factors weigh on the company and therefore the share price.
While sales of wireless services are growing, overall revenue is not. In the third quarter, total revenue of $33.3 billion was flat compared to 2023. The company’s revenue growth stalled as equipment sales fell year over year in a macroeconomic environment of lower spending on consumer durables.
Another factor is Verizon’s large debt load. The telecom provider ended the third quarter with more than $150 billion in debt on its balance sheet. This debt may increase as the company prepares for an acquisition Frontier Communications parenta broadband internet provider, in the coming months.
That said, the acquisition of Frontier allows Verizon to strengthen its fast-growing broadband business, which also helps deliver AI at the edge. At the end of the third quarter, Verizon had a total of 12 million broadband connections, representing 16% year-over-year growth. The acquisition of Frontier will nearly double this by adding an estimated 10 million homes by 2026.
Although Verizon carries a large debt load, the company benefits from its ability to generate strong free cash flow (FCF). FCF provides insight into the money available to invest in the company, pay debts and finance dividends. The company’s FCF in the third quarter was $6 billion, bringing the year-to-date total to $14.5 billion.
This easily covered Verizon’s $8.4 billion in dividend payments through the first nine months of 2024, leaving money to pay down debt and support business growth. Dividends are a major reason to consider an investment in Verizon. The company’s dividend yield is a whopping 7%. Additionally, Verizon increased its dividend for the 18th year in a row in September. This long run of increases, plus the telecom sector’s excellent FCF, means it is a reliable source of passive income.
Furthermore, the fact that Verizon recently hit a 52-week low led to a price-to-earnings (P/E) ratio of eight. This metric helps assess stock valuation by telling you how much investors are willing to pay for a dollar of income based on estimates for the next twelve months.
Data per YCharts.
Verizon’s price-to-earnings ratio is lower than its main rivals. AT&T And T-Mobile USA. This suggests that its shares have better value than those of its competitors. The low forward earnings numbers, coupled with a robust dividend, strong free cash flow, and a growing wireless services business, combine to make Verizon stock a buy.
Hold shares as a long-term investment to benefit from the dividend as the telecom titan tackles the growing AI edge computing market.
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Robert Izquierdo holds positions at AT&T, Nvidia, T-Mobile US and Verizon Communications. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
Is Verizon an Undervalued Artificial Intelligence Stock to Buy in 2025? was originally published by The Motley Fool