Verizon Stock Seen Pricey; Brokers Ask If IPhone Can Spark Growth

SAN FRANCISCO (Dow Jones)--Investors in Verizon Communications Inc. (VZ) have been betting big on the company's newly announced deal to sell Apple Inc.'s (AAPL) iPhone product--pushing the stock to some of its highest valuation levels in the past decade.

That has sparked debate on Wall Street about how economically beneficial the device will be to the carrier, despite widespread projections calling for the sale of 10 million units or more this year.

In particular, the iPhone likely will be heavily dilutive to Verizon's earnings this year, given the subsidies the carrier will have to shell out to Apple for the device.

And it remains unclear whether the iPhone will spark growth in average revenue per user, or ARPU, which is a closely watched metric in the wireless business.

Investors are betting it will. Verizon shares have climbed more than 30% over the past six months--compared to a gain of only 12% for arch-rival AT&T Inc. (T).

Verizon now trades at about 16 times expected earnings for the next four quarters, up 45% from its multiple in mid-2011 and near its high of 16.3 over the past 10 years, according to data from FactSet Research. AT&T currently trades around 11.4 times earnings.

So will the iPhone greatly expand Verizon's subscriber base, or merely help the carrier keep more of its existing customers?

"Because there is not as much subscriber growth available as there once was, the hope now is that--if the carriers can cap data usage--users will pass those caps and drive up revenue," said Tim Horan of Oppenheimer in an interview Wednesday.

Horan said most benefits of the iPhone's expansion will go to Apple, which gets about $400 for each device in a subsidy from carriers and draws most of the economic benefits from its ubiquitous iTunes and App Stores, which sell content for the devices. The subsidies will also pressure Verizon's earnings by 20 cents a share this year, he estimated.

As such, Horan said he maintained a perform, or neutral, rating on Verizon's shares following the iPhone announcement.

Others are more optimistic. Goldman Sachs upgraded Verizon to a buy rating Wednesday and downgraded AT&T to neutral. In a note to clients, analyst Jason Armstrong said Verizon's growth potential is undervalued, even at the shares' current level.

"Verizon has the largest postpaid sub [subscriber] base but significantly under-indexes in smartphone penetration, which creates the opportunity, particularly given the 2011 device lineup," Armstrong wrote. He said he expects the carrier to be able to grow ARPU by nearly 7% this year.

-By Dan Gallagher, 415-439-6400; AskNewswires@dowjones.com