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Buy Verizon (And The Small Company It’s Eyeing for a Buyout)

During the late 1990s, Yahoo was one of the top independent Internet companies, considered a true pioneer with both free email and search services. Yahoo also boasted the distinction of being one of the few among its peers to survive the bursting of the dot-come bubble in 2000, when the NASDAQ stock index crashed from 5,000 to 2,000.

At its peak in 2000, Yahoo had a market cap of $125 billion (today it’s $36.24 billion). The company couldn’t keep up in the rapidly changing and fiercely competitive online world when brash upstarts like Google and Facebook muscled in and launched social network and app technology. Yahoo lost its mojo and never got it back.

But through its surprising purchase of beleaguered Yahoo, telecom giant Verizon can now forge a massive digital video advertising platform. This business plan was evident when Verizon bought AOL last year, as well as several other advertising-related firms, including a large piece of Microsoft’s (NASDAQ: MSFT) advertising technology business.

Verizon isn’t just creating new profit opportunities by gobbling up Yahoo — the telecom behemoth (market cap: $223.61 billion) also is trying to stay ahead of the curve. After years of torrid growth, conventional global mobile telecommunications is slowing as the Internet changes the way people communicate and share information.

The game-changers in telecom these days include Microsoft’s Skype, which allows users to make both video and voice calls from virtually anywhere on the planet for an extremely low cost, and Facebook’s Messenger, through which users can not only communicate but order products and services.

To ensure its long-term survival — and spark a catalyst for new growth — Verizon must delve into different aspects of telecom technology, such as digital ads. Verizon is executing a far-sighted strategic pivot that will not only make money for investors but also keep VZ from becoming a dinosaur. By first purchasing AOL and then Yahoo, Verizon is amassing companies with robust ad technology to build a huge platform that will take the fight to Google and Facebook. 

That’s why Verizon is a great buying opportunity right now, before its recent moves gain tangible traction and their efficacy become obvious to traders. In situations such as the Verizon/Yahoo deal, the shrewd investment move is to wait until the rumors have dissipated and the actual news hits. In doing so, sometimes you’ll miss the first 10% or so move in a stock. But you should be okay with that, because you also eliminate a lot of the risk. By patiently waiting until the news has actually happened, you’ll profit as that fundamental change bears fruit in the future.

Fact is, when news like this acquisition happens, investors often don’t fully appreciate it.  But the other part is that often when something is brand new, whether it’s a new customer, new product line, or maybe something like geographic expansion, the companies themselves don’t know the full potential of the news, which means they understate its significance to the investment community. That’s how buying opportunities are born.

Just as embracing cloud computing has saved software giants such as Oracle (NYSE: ORCL), IBM (NYSE: IBM) and Adobe (NASDAQ: ADBE), digital advertising will help maintain the relevancy and profits of the major telecoms. With the largest portfolio of ad technology, Verizon now dominates the nexus of digital advertising and telecommunications.

Verizon currently trades at a trailing price-to-earnings (P/E) ratio of 15.6, still a bargain compared to the trailing P/E of 24.9 for the telecommunications industry. The time to buy shares of VZ is now, before the rest of the investment crowd realizes that the company has made a major dent in the online universe.

If you’re willing to venture outside of blue-chip Dow Jones Industrial Average stocks like Verizon, you should also consider a development our special-situations analyst Linda McDonough is following right now. It’s the next clear acquisition target for Verizon, Google, Facebook, or even Amazon. Just days ago, Goldman Sachs, not one for off-the-cuff predictions, put this company on a short list of candidates that could be acquired at any minute. And after Microsoft announced its $26 billion buyout of LinkedIn, Evan Wilson, a respected analyst from research firm Pacific Crest Securities, listed this company as a “most likely acquisition” with a “wide number of potential acquirers.” Click here to get the full story.

 


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