The advent of artificial intelligence led to a rise in companies claiming AI capabilities. Although not all of these are worthy AI investments, telecommunications giant Verizon (VZ 0.42%) may be a sleeper AI stock that is being overlooked.
AI stock Nvidia, for example, saw shares rise more than 130% over the past 12 months through the week starting January 13. Meanwhile, as recently as January 10, Verizon shares hit a 52-week low of $37.59, and shares remain near the low at the time of this writing.
But how is Verizon contributing to the AI market's expansion? And is it a buy with its share price down? Let's dig into the company to address these questions.
Verizon's role in AI industry growth
Verizon plays an important role in the growth of the AI industry because of its 5G wireless network. This 5G system supports the fast speeds and cybersecurity required to deliver AI to devices on the edge of a computer network, such as laptops and mobile phones.
This AI-enabled edge computing is forecasted to grow from $27 billion in 2024 to $270 billion by 2032 as businesses adopt artificial intelligence to help in industries such as automotive, manufacturing, and healthcare. Delivering AI to the edge is a factor to facilitating adoption of self-driving cars, robotics, and the Internet of Things.
One tangible example of Verizon's role in AI for edge computing is its partnership with Nvidia to deliver AI to what are called private networks. These are wireless services dedicated to specific organizations. For instance, Verizon will provide a private network to FIFA for the men's 2026 World Cup.
According to CEO Hans Vestberg, "As we expand our 5G Ultra Wideband network and scale our private networks business, we're opening up new opportunities for growth and innovation."
Bringing AI to the edge positions Verizon to do just that. The company is already doing well growing its revenue from wireless services. In Q3, this part of Verizon's business produced $19.8 billion in sales, a 3% year-over-year increase.
What's hurting Verizon's share price
Verizon's potential sales upside bringing AI to the edge seems promising given AI edge computing industry growth serves as a tailwind. But several factors weigh on the company, and hence, its stock price.
While wireless service sales are growing, overall revenue is not. In Q3, total sales of $33.3 billion was flat compared to 2023. The company's revenue growth has stalled as equipment sales fell year over year amidst a macroeconomic environment of lower consumer discretionary spending compared to 2021, the year inflation began to take off.
Another factor is Verizon's large debt burden. The telecom exited Q3 with over $150 billion in debt on its balance sheet. This debt could grow as the company prepares to acquire Frontier Communications Parent, a broadband internet service provider, in the coming months.
That said, the Frontier acquisition sets Verizon up to strengthen its rapidly growing broadband business. In Q3, Verizon grew total broadband customers by 389,000, the ninth straight quarter of at least 375,000 net additions. At the end of Q3, the telecom had total broadband connections of 12 million, which represents rapid growth of 16% year over year. Acquiring Frontier will nearly double this by adding an estimated 10 million homes by 2026.
Other factors to consider with Verizon stock
Although Verizon shoulders a large debt burden, the company benefits from a strong ability to generate free cash flow (FCF). FCF provides insight into the cash available to invest in the business, pay debt obligations, and to repurchase shares or fund dividends.
The company's Q3 FCF was $6 billion, bringing the year-to-date total to $14.5 billion. This easily covered Verizon's $8.4 billion in dividend payments made through the first nine months of 2024, leaving cash to pay down debt and support business growth.
And dividends are a key reason to consider an investment in Verizon. The firm's dividend yield is a staggering 7% at the time of this writing. Verizon raised its dividend for the eighteenth straight year in September. This long streak of dividend increases combined with the telecom's strong FCF generation represents a reliable source of passive income.
On top of that, Verizon's recent share price drop led to a forward price-to-earnings (P/E) ratio of eight. The forward P/E ratio helps with stock valuation by telling you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months.
Data by YCharts.
Verizon's P/E multiple is lower than its two main rivals, AT&T and T-Mobile, at the time of this writing, indicating its stock is a better value than these competitors.
This coupled with a robust dividend, strong FCF, and a growing wireless service business combine to make now a good time to buy Verizon stock. Hold onto shares as a long-term investment to benefit from its dividend while the telecom titan works to benefit from the growing AI edge computing market.
