Key Points

• Despite strong user growth, the stock price of Verizon still gave back some of its morning gains.
• Amazon signs a $2 billion AI infrastructure agreement with Verizon
• Revenue falling short of expectations, coupled with intensified competition from SpaceX, makes the transformation of Verizon even more complex.

Verizon stock ( VZ ) fell by about 2.5% during Monday's morning trading session. Previously, the company announced the addition of 406,000 postpaid mobile users and also revealed that it had reached an artificial intelligence infrastructure agreement with Amazon Web Services worth over $2 billion.

This decline reversed the 2.4% gain of Verizon before the market opened. Investors are balancing between strong user recovery and revenue that fell short of expectations, as well as increasingly fierce wireless competition.

According to the financial report released by Verizon on October 26th, revenue in the third quarter increased by 1.5% year-on-year to $34.3 billion, but fell short of Wall Street's forecast of around $34.74 billion. Adjusted earnings per share were $1.31, which is higher than the market's expectation of around $1.27.

Therefore, the initial optimism in the market regarding Verizon's profits exceeding expectations gradually subsided after regular trading commenced.

Verizon Added 406,000 new users, but revenue fell short of expectations

The user growth of Verizon is the strongest in the third quarter over the past five years, with an increase of more than 820% compared to the same period last year, adding 44,000 new users.

This result is also nearly twice the estimated 209,000 new users of Visible Alpha, indicating that the simplified pricing strategy of CEO Dan Schulman is attracting customers.

However, device revenue decreased by 9% because users are keeping their phones for longer periods of time, and Verizon reduced the costly device subsidies.

This trade-off explains the seemingly contradictory situation between the stronger demand for wireless services and the disappointing overall revenue.

Nevertheless, Verizon has raised the target for new postpaid mobile users for the entire year to 1.1 million to 1.2 million, from the previous range of 750,000 to 1 million.

The company also raised its outlook for earnings per share after adjustment to $5.04 to $5.06, and disclosed that quarterly free cash flow was $7.8 billion, a year-on-year increase of 12.1%.

These improvements indicate that, despite investors' doubts about the overall rate of revenue growth, the company's operational efficiency is on the rise.

Amazon invests $2 billion in a AI agreement to open another revenue stream for Verizon

The agreement between Verizon and Amazon Web Services has established a commercial framework for supporting distributed computing and high-capacity fiber optic connections for AI workloads.

Following this arrangement worth over $2 billion, there is another agreement with Google worth over $1 billion, which is used to connect data centers.

For Verizon, these collaborations provide an opportunity to benefit from the expansion of AI's infrastructure, without the need to compete directly with NVIDIA or to develop large-scale AI models.

On the contrary, companies can provide the physical connections necessary to transmit massive amounts of information between computing facilities.

Amazon's previous investment in the AI chip indicates that this hyperscale cloud service provider is expanding different components of its computing infrastructure.

However, Verizon has not disclosed sufficient details to determine how quickly the value of the contract with Amazon will be converted into revenue or profit.

This is very important because investors are paying more and more attention to the returns on AI expenditures, and no longer regard each infrastructure announcement as an immediate catalyst for profits.

The expansion of Starlink to Verizon puts pressure on the stock price.

Verizon also faces new challenges from SpaceX under Elon Musk, which is expanding from its satellite connectivity business to direct competition with mobile communications.

Earlier this month, a spectrum agreement worth approximately $8 billion involving SpaceX triggered significant selling of shares in Verizon, AT &T, and T-Mobile.

Recently, reports about SpaceX seeking to connect with 80,000 American cellular base stations have further intensified market concerns regarding its competition with existing mobile operators.

This proposal does not imply that SpaceX already has a nationwide terrestrial network in operation, but it has indeed raised questions from the outside world about the future competitive position of Verizon.

Schulman indicates that it will take four to six years to replicate the infrastructure on the ground of Verizon, as well as an investment of 300 billion to 500 billion US dollars, highlighting the scale of the company's existing network advantages.