There is a budding argument that Verizon Communications Inc. (NYSE:VZ) is approaching a potential bubble. In the past six months alone, the stock has trended up 29%. It currently trades close to its 52-week high of $54.31. This growth has stirred the argument that perhaps the stock is approaching a cliff. Indeed, Verizon Communications Inc. (NYSE:VZ)’s stock has gone past its key support points and by the book — and only the book — it needs to be sold. But is this really the case? We will find out later on in the article.
Potential deal remains key driver for growth
The prospects inherent in the possible buyout of Vodafone Group Plc (ADR) (NASDAQ:VOD)’s 45% stake in Verizon Wireless have been one of the key contributory factors behind the rally. On Verizon Communications Inc. (NYSE:VZ)’s part, the deal would provide more traction as far as 4G is concerned. It would also plug the cash drain that goes to Vodafone Group Plc (ADR) (NASDAQ:VOD) through dividends; allowing Verizon to buff up its coffers and accelerate operations.
Despite the bright outlook presented by the deal, discussions are at a stalemate. Why is this so? And more importantly, why isn’t this working against Verizon Communications Inc. (NYSE:VZ)’s share price?
Discussions have been at a stalemate because of diverging opinions that both parties have on the value of the 45% stake at hand. Vodafone Group Plc (ADR) (NASDAQ:VOD) wants $130 billion while Verizon Communications Inc. (NYSE:VZ) is only willing to give $100 billion. The reason why investors are still positive on the possibility of a deal is that many people, including industry specialists, believe that Vodafone will eventually take the $100 billion. Some analysts have even started spending (hypothetically of course) this $100 billion.
Another key reason why the deal is likely to work out is that Vodafone is in need of money. Back in its European backyard, things aren’t as blissful as they once were. Despite its dominance in Europe, it is facing stiff competition from media companies and cable operators; not to mention withering macroeconomics. In view of this, the company has signed off to a deal with Deutsche Telekom AG. The deal, struck earlier in the month, will allow Vodafone to enhance its product offering in broadband and TV. A huge capital injection at this moment will accelerate operations and give Vodafone Group Plc (ADR) (NASDAQ:VOD) an edge in offsetting progress made by competitors.
Vodafone Group Plc (ADR) (NASDAQ:VOD) CEO Vittorio Colao has told The Wall Street Journal that he is still open-minded about a Verizon deal. This comes at the heels of a $7 billion dividend payout that Vodafone received from Verizon Wireless. Vodafone intends to improve its worsening European situation with this cash.
Looking at Vodafone Group Plc (ADR) (NASDAQ:VOD) and its current position, I believe that it will be better off agreeing to the deal. Fortunately, investors know this. This explains why they are not letting go of Verizon Communications Inc. (NYSE:VZ). On the other hand, Verizon will also push relentlessly for the deal. The recent METROPCS COMM. DL-,0001 (FRA:PU9) deal with T MOBILE US INC (NYSE:TMUS) means more competition for Verizon. As such, increasing its control of key sectors of the industry remains a top priority. Although METROPCS COMM. DL-,0001 (FRA:PU9) has only 9 million subscribers, the support it will get from T-Mobile, now that the two are one, could impact Verizon negatively. The idea behind METROPCS COMM. DL-,0001 (FRA:PU9) and T MOBILE US INC (NYSE:TMUS) is to operate like one company under two brands. This may gnaw into untapped segments of the markets; segments that belong to Verizon. It is therefore very important that Verizon inks a deal with Vodafone.
Conclusion
Verizon’s uptrend is likely to hold for the next several months. And if the deal is successful, it could trend upward even further, pushing the stock into a whole new territory. Although it is trading close to 52-week highs, there is still more room for share price improvement. The rally hasn’t fully played out and it’s still not too late to get onto this ship.
The article The Market Decides If There Is a Bubble and When It Bursts, Not Statistics originally appeared on Fool.com is written by Lennox Yieke.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Lennox is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
