Yesterday, U.S. telecom behemoth Verizon Communications Inc. VZ entered into a three-year minimum purchase agreement with Corning Inc. GLW to buy fiber optic cables and associated hardware for its nationwide wireless broadband network. Per the deal, Verizon will acquire up to 20 million kilometers (12.4 million miles) of optical fiber each year from 2018 through 2020 from Corning, with a minimum purchase commitment of $1.05 billion.
Verizon has decided to install dark fiber based network throughout its footprint in order to support the existing 4G LTE network and more importantly to transition into the upcoming 5G wireless network. The company acquired dark fiber, for the first time, through its acquisition of MCI in 2006.
Dark fiber provides abundant bandwidth which is of utmost necessity for the smooth functioning of super-fast wireless networks such as 4G and 5G. Dark fiber based backhaul provides scalability and efficiency to bandwidth management. This will eventually lead the company to significantly reduce its backhaul costs.
In Feb 2017, Verizon acquired privately held XO Communications Inc.’s dark fiber optic network. This will significantly enhance the capacity of the services Verizon offers to its business and wholesale customers, giving it a foothold in the data center interconnection market. Additionally, it will bolster Verizon’s cell network density thereby boosting its mobile backhaul network. The densification of cell network will help the company install and build its upcoming 5G network.
Adoption of small cells has increased due to the inconvenience of installing large towers in inaccessible areas. Verizon stated that small cells will be used to augment its existing 4G LTE and upcoming 5G network and will primarily concentrate on high traffic locations like a business district or a shopping mall. The company expects these to increase its voice capacity and data speeds and to complement its current 4G LTE infrastructure. The networks will require fiber-optic connections to local hubs, which link to "long haul" Internet infrastructure.
The densification of cell network will significantly help the company to install and build its upcoming 5G network. Verizon’s competitors, such as, AT&T Inc. T, Sprint Corp. S and CenturyLink Inc. CTL are also strengthening their dark fiber network for small cell wireless backhaul.
Price performance of Verizon
Year to date, the stock price of Verizon has witnessed a loss of 7.77%, underperforming the Zacks categorized U.S National Wireless industry’s decline of 4.59%.
Nevertheless, Verizon has a very powerful diversified business model. In the wireless front, it will start initial deployment of the upcoming 5G network in 2018 while on the wireline front, the company is aggressively expanding fiber-based footprint. In the digital media front, Verizon has become a major contender for the lucrative online advertisement business. We believe these are the primary reasons behind the stock currently carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
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