Verizon Connect

• The Bottom Line: Verizon Connect is a high-growth, high-margin software and technology business tucked inside the telecom giant Verizon, and learning to analyze it is a masterclass in how value investors find a company's hidden crown jewels.
• Key Takeaways:
• What it is: It's a suite of cloud-based software that helps businesses manage their vehicles, workers, and assets (often called “fleet management” or “telematics”).
• Why it matters: It represents a sticky, fast-growing business model that is far more attractive than Verizon's core slow-growth wireless business. Understanding it is key to performing a proper sum_of_the_parts_analysis of Verizon.
• How to use it: Treat it as a case study for digging into a company's annual report to find valuable segments the market might be overlooking, a technique central to value_investing.

Imagine Verizon Communications ($VZ) is a massive, sprawling farm. For decades, everyone has focused on its two main crops: the vast fields of “Wireless Corn” (your mobile phone plan) and the reliable orchards of “Fios Apples” (your home internet). These are huge, dependable, but they don't grow very fast anymore. They are mature crops. Now, imagine that tucked away in a high-tech greenhouse behind the main barn is a special operation a lot of visitors miss: Verizon Connect. This isn't a simple crop; it's a sophisticated hydroponics system growing rare, high-value orchids. This division doesn't sell phone plans to you and me. Instead, it sells a powerful software platform to other businesses—plumbing companies, trucking firms, delivery services, and construction crews. This software platform allows a business owner to see their entire fleet of trucks or vans on a single map in real-time. It can tell them:

• Which driver is closest to a new emergency job.
• If a truck is speeding or braking too harshly, wasting fuel.
• When a vehicle needs its next oil change, automatically.
• If expensive equipment has been left behind at a job site.

In short, Verizon Connect is a B2B (Business-to-Business) technology division focused on the “Internet of Things” (IoT). It connects a company's physical assets—its vehicles and equipment—to the internet, providing data that helps the company run more efficiently, save money, and improve safety. It's a classic SaaS (Software as a Service) business, where customers pay a recurring monthly fee per vehicle, creating a predictable and “sticky” stream of revenue. For an investor, recognizing that the slow-growing farm also owns a high-tech orchid greenhouse is the first step toward understanding the true value of the entire property.

“The best business is a royalty on the growth of others, requiring little capital itself.” - Warren Buffett ¹⁾

A true value investor doesn't just look at a company's stock price or its consolidated financial statements. They act like a detective, piecing together clues to determine a business's real intrinsic_value. Analyzing a segment like Verizon Connect is a critical piece of this detective work for several key reasons:

• Uncovering Hidden Growth Engines: Verizon as a whole is a mature, slow-growth utility. Its revenue might grow 1-2% a year. But a segment like Verizon Connect could be growing at 10-15% or more. The sluggish overall growth rate can mask the dynamism of its smaller, more exciting parts. By identifying these pockets of growth, an investor can argue that the market is unfairly valuing the entire company based on its slowest-moving part.
• Identifying a Deeper Economic Moat: A company's durable competitive advantage, or “moat,” is the cornerstone of value investing. While Verizon's main wireless business has a moat (its vast network), the moat around Verizon Connect is arguably even stronger. Once a company with 200 trucks installs Verizon's hardware and trains its dispatchers and drivers on the software, the cost and hassle of switching to a competitor are enormous. This creates high switching_costs, a powerful moat that leads to predictable, recurring revenue for years to come.
• The Power of Sum-of-the-Parts (SOTP) Analysis: This is a core valuation technique. Instead of valuing Verizon as one giant entity, you can break it into pieces and value each one separately.
  • The mature wireless business might be valued like a utility, at maybe 6x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
  • A high-growth, high-margin SaaS business like Verizon Connect, however, could be valued by the market at 15x EBITDA or even higher if it were a standalone company.

By doing this math, a value investor might discover that the combined value of the parts is significantly higher than Verizon's current stock market capitalization. This gap represents a potential margin_of_safety.

• Potential for Value Unlocking via Spin-Off: When a conglomerate's stock is undervalued because the market doesn't appreciate its individual parts, management can sometimes “unlock” that value by spinning off a division into a new, publicly-traded company. If Verizon were to ever spin off Verizon Connect, shareholders would receive shares in a new, high-growth tech company, which the market would likely value much more highly than it does when it's buried inside a telecom giant. Recognizing this potential is a key part of an advanced value investing thesis.

You don't need a PhD in finance to be a business detective. You just need to know where to look and what questions to ask. The primary tool is the company's annual report, the Form 10-K, which is filed with the SEC each year and available for free on the company's “Investor Relations” website.

1. Step 1: Find the Segment in the 10-K. Download Verizon's latest 10-K report. Use “Ctrl+F” to search for “Business Segments.” In this section, companies are required to break down their revenue and operating income by their major divisions. You'll find that Verizon reports two main segments: “Verizon Consumer Group” and “Verizon Business Group.” Verizon Connect is a major part of the “Business” segment. While they may not give you a specific line item for “Connect,” they will discuss its performance in the text. Read these paragraphs carefully.
2. Step 2: Evaluate the Segment's Economics & Competitive Position. Now, put on your business owner hat.
   • Growth: Is the revenue for the Verizon Business segment growing faster than the Consumer segment? The 10-K's text will often explain what is driving that growth. Is it “continued demand for our fleet management and IoT services”? That's your clue.
   • Profitability: How profitable is the segment? Software businesses typically have much higher profit margins than capital-intensive telecom businesses. The 10-K will provide operating income for the segment. Is the margin (Operating Income / Revenue) for the Business segment higher or lower than the Consumer segment?
   • Competitors: Who are the main competitors? A quick search reveals pure-play telematics companies like Samsara and Geotab. Look at how these public competitors are valued. This gives you a benchmark for what Verizon Connect could be worth.
3. Step 3: Perform a Back-of-the-Envelope SOTP Valuation. This sounds complex, but the concept is simple. Let's create a hypothetical table to illustrate the logic:

^ Business Segment ^ Estimated Revenue ^ Business Type & Growth ^ Plausible Valuation Multiple (EV/Sales)^ Estimated Value ^

²⁾

The goal of this exercise isn't to find a precise number, but to understand the structure of the business. If your SOTP valuation suggests a total value significantly higher than the current market capitalization, you may have found an undervalued opportunity. The key insight is that the market often applies a single, blended valuation multiple to the entire company, usually one appropriate for its largest, slowest business. It's like valuing the entire farm—including the high-tech orchid greenhouse—at the price of simple farmland. The value investor's job is to spot this mispricing and understand the quality of the assets the market is ignoring.

Let's compare the two sides of Verizon's brain: its traditional wireless business versus a business like Verizon Connect. This helps clarify why segment analysis is so vital.

By simply laying out the different characteristics, you can see they are two fundamentally different businesses. Lumping them together under the single banner of “Verizon” means you miss the most attractive part of the story.

• Built-in Distribution Channel: Verizon already has relationships with millions of businesses for their phone and internet services. This makes it easier and cheaper to cross-sell them fleet management services compared to a standalone competitor that has to build a customer base from scratch.
• Brand Trust and Scale: The Verizon brand is known and trusted for reliability, which is critical when a business is entrusting its entire fleet operations to a provider. Its scale allows it to invest heavily in R&D.
• Deeply Integrated Moat: As mentioned, the high switching_costs are a formidable competitive advantage. The service becomes deeply embedded in the customer's daily workflow, making it very difficult to rip out and replace.

• Lack of Transparency: This is the biggest challenge. Because Verizon doesn't report Verizon Connect as a standalone segment, investors must piece together clues. Management isn't obligated to tell you exactly how well it's doing, which adds a layer of uncertainty.
• Intense Competition: While Verizon is a giant, it faces fierce competition from nimble, pure-play technology companies (like Samsara) that are 100% focused on this market. These competitors may innovate faster.
• “Orphan” Status Within the Conglomerate: Sometimes, a small, dynamic division within a giant company can be starved of capital and attention. Management might be so focused on the main “Wireless Corn” business that the “orchid greenhouse” doesn't get the resources it needs to thrive. An investor must watch for signs of this neglect.

• sum_of_the_parts_analysis
• economic_moat
• switching_costs
• scuttlebutt
• intrinsic_value
• circle_of_competence
• spin_off
• value_investing