A lack of phone upgrades has been weighing on Verizon’s growth, but that could soon change.
A big problem for telecom companies such as Verizon Communications (VZ 0.57%) these days is that consumers aren’t rushing to upgrade their phones. At a time when inflation is forcing people to stretch their budgets, one easy way to keep costs down is to resist the urge to upgrade a cellphone that’s working fine, and to avoid potentially having to take on a more expensive phone plan as well.
Here’s how long consumers are waiting to upgrade their phones, and why that could soon change.
Consumers are holding on to their phones for longer than 36 months
Verizon CEO Hans Vestberg said in a recent interview with CNBC that its current customer holds on to their phone for “way over 36 months,” compared to in the past, when it was normal to change a phone every year. The company offers promotions for 36 months to help pay for a new phone, but Vestberg’s statement suggests that consumers are keeping them even after the promo period ends.
While Verizon did increase the length of its payment terms a couple of years ago, it’s still possible for customers to pay off a phone early. The long period consumers are going through before upgrading their phone is indicative of both the current economic conditions and the lack of urgency to upgrade; consumers aren’t seeing an incentive to upgrade early, even perhaps after their phone is fully paid off.
Why an upgrade cycle could be coming soon
Although the economic situation may not be improving soon with fears of a recession rising, there could at least be an incentive for customers to upgrade their phones soon.
Apple is launching new phones with artificial intelligence (AI) capabilities that could give consumers the incentive they finally need to upgrade their phones sooner rather than later. Even though some of Apple’s new AI features may not be coming until next year, users will need to upgrade to the latest, most powerful iPhones to be able to take advantage of them, including image generation and a more advanced assistant.
Critics believe that Apple is doing this to force customers into upgrading, triggering what some are calling a potential upgrade “supercycle.” Not only could Apple benefit from more upgrades, but that would also be welcome news for Verizon and other telecom companies that would lock customers into new contracts and plans.
In Verizon’s most recent quarter, which ended in June, its total operating revenue of $32.8 billion rose by just 0.6% year over year, with the company blaming a part of that on “lower upgrade volumes.”
Should you buy Verizon’s stock?
An upgrade cycle, or a “supercycle,” could be just what Verizon’s business needs for its growth rate to accelerate and for it to attract some much-needed attention from investors. Over the past three years, the stock has fallen by 28%, making it an underwhelming investment overall. As investors have focused on growth stocks, Verizon has simply fallen out of favor in the market.
But with a high dividend yield at 6.5% and a potential catalyst on the way for its top line, now may be an optimal time to add Verizon to your portfolio, potentially before its growth rate improves and before it lands on the radars of investors who may have been waiting for more of a reason to invest in the stock. Although Verizon may not be a high-powered growth machine, it can make for a solid income stock to buy and hold for the long haul.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
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