Back in the day, I would have let the stock position ride, seeking a double-digit gain into earnings. Given the negative impact of Verizon’s more-than-serviceable second-quarter earnings report on the stock, I’m glad I bailed. Revenue at Verizon grew 3.7 percent year-over-year. Earnings per share popped by more than 12 percent. Smartphone adoption continues at an impressive clip, driving data usage.
Wireless margins look good and the company expects them to continue to improve in the second half of the year. FIOS continues to gain traction.
However, revenue in Verizon’s enterprise business did not meet expectations. Analysts chalked up the nearly 3 percent drop in the stock on Thursday to that.
I’m not buying it.
Other, bigger-picture reasons should trigger caution in relation to not only Verizon, but AT&T. First, allow me to disclaim. As a relatively “safe” core holding, I have no problem with Verizon or AT&T. Both pay nice dividends that will not go anywhere anytime soon, if ever. And they run solid businesses with exciting growth prospects. It’s just that relative to other dividend payers, particularly in the media and telecommunications space, growth at these two companies could lag.
Simply put, I would not undertake a long-term, buy-and-hold position in either stock in search of growth and significant returns going forward. I would entertain core long positions in Verizon and AT&T, however, on the basis of relative stability in the two names that makes them more attractive places to park cash than an online savings account yielding 0.80 percent.
With that in mind, regulatory issues in the U.S. will not allow Verizon or AT&T — at least for the foreseeable future — to reach the pinnacle of their growth potential. I use a broad definition of potential — classifying it as what is possible, all else held constant. For goodness sake, the Federal Communications Commission and Department of Justice would not let AT&T buy T-Mobile so the former could get its hands on much-needed wireless spectrum.
To move the needle on the issue, Verizon recently forged a spectrum-swapping deal with T-Mobile that amounts to an end-run around pesky bureaucratic walls. Meantime, the feds allow DISH Networkto sit on spectrum rights it says it plans to use to build out its own network ... someday.
As I have written in past articles for TheStreet, U.S. investors should look to Canada for a view of media and telecommunications companies able to reach for their full potential. The Canadian government allowsRogers Communications and BCEto run in areas Verizon and AT&T would probably never consider broaching.
It’s a relatively level playing field in Canada. You don’t have government giving a company such as Amazon.comcarte blanche to run roughshod in multiple spaces, while curtailing the imaginations and ambitions of companies with similar opportunities in the same as well as related sectors.
AT&T’s maneuvering could not push the T-Mobile deal through. As such, you’re dreaming if you think the government would permit the company to take out DISH. AT&T would probably have a tough enough time even securing its spectrum.
In any event, while AT&T dabbles in U-Verse and Verizon tinkers with FIOS, Rogers and Bell run massive delivery systems and programming networks on a regional and national basis. They also own major professional sports teams and arenas.
The massive cross-promotional possibilities inherent throughout the Rogers and Bell ecosystems portend the type of massive growth investors have hardly even begun to price into either stock, recent runs notwithstanding.
While potentially lucrative, Verizon and AT&T will both hit a wall peddling smartphones in the U.S. Of course, they’ll expand in other areas, but, frankly, I do not see anything but moderate growth opportunities over the next decade or two unless the regulatory environment in the U.S. undergoes wholesale change.
There’s half a chance that a big American telecom like AT&T or Verizon could make a run at the Canadian market thanks to recently passed legislation in that country that allows for foreign ownership of smaller wireless firms. But, that’s unlikely to happen as it’s probably way more trouble than it’s worth for either company. Plus, despite the size of Verizon and AT&T, going up against entrenched entities such as Rogers and Bell likely represents a losing battle.
So, if you’re seeking growth, many other, more exciting opportunities exist.
Near the top of the list heading into 2013: Microsoft.
TheStreet and reporter Chris Ciaccia mentioned, but did not focus on Microsoft’s (so many loved saying this) “first-ever quarterly loss” in his recap of the company’s earnings.
The loss is a non-story. It had everything to do with a writedown and nothing to do with Microsoft’s most recent quarter and the company’s future prospects. The reports that put “loss” in the headlines provided no context, let alone utility for the reader.
In afterhours trading Thursday, Microsoft initially moved lower before surging and settling in the $31.40 area. Regardless of how the stock does in the near term, growth prospects at Microsoft range wider and, if realized, should impact the company’s bottom line and stock price considerably.
While the Surface tablet could eat into PC sales just a bit, I don’t see that effect having a major impact on Microsoft’s overall business. As Ciaccia noted, the company’s servers and tools division brought in more than $5 billion in revenue, a 13 percent year-over-year increase.
It’s likely safe to assume that many customers — enterprise and otherwise — have delayed purchases in anticipation of Windows 8. When Microsoft starts to record this revenue, it should not only continue to drive its existing business lines, but enhance them with the mobile-related revenue Windows 8 smartphones and tablets (particularly the Surface) should drive.
I will likely take profits on the Microsoft January 2013 $30 calls I own within the next several days, if not on Friday. Again, it’s about discipline. However, I do intend to open a new position later this summer either in the stock or January 2014 call options.
—By TheStreet.com Contributor Rocco Pendola
Additional News: Microsoft Takes $6.2 Billion Charge
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CNBC Data Pages:
TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Rocco Pendola was long BCE, Microsoft, and Rogers Communications.