The next pricing event has yet to happen for shares of Verizon Communications (NYSE: VZ), even though the sale of Apple Inc.'s (Nasdaq: APPL) mega-popular iPhone today was a record sale event for Verizon.
Kim Caughey Forrest, an analyst at Fort Pitt Capital in Pittsburgh, said investors and analysts shouldn’t be concentrating on Verizon’s sale of the iPhone today because it is an event that became old news before it ever happened.
Rather, investors and analysts should be focused on how well the Verizon network will work on the iPhone and how its $1.4-billion acquisition of cloud-computing service provider Terremark will play out, she said.
If anything, Verizon’s record sale today of Apple’s iPhone further validates a concept that has been widely debated among financial academics for the past three decades, efficient market hypothesis (EMH).
EMH was developed by Eugene Fama, a finance professor at the University of Chicago’s Booth School of Business and a Nobel Prize winner in economics. The theory itself is remarkably simple: that it is nearly impossible to beat the broad stock market in any given time period because stock prices generally tend to reflect all available and relevant information about the underlying companies.
Critics say EMH is not valid mainly because it does not account for the sometimes irrational decisions made by investors, such as what was seen at the height of the tech bubble in the late 1990s.
Caughey, a lukewarm proponent of EMH, said it was valid in today’s case, given that Verizon shares edged down by 0.22 percent, despite the sale.
“The announcement in November that it would become a carrier for the iPhone was the price-moving event,” said Caughey-Forrest.
“The sale today stopped affecting Verizon’s price a while ago. It was really a foregone conclusion that the iPhone is the hottest thing since sliced bread. Most people knew that Verizon customers wanted the iPhone but were hesitant in making the switch because they liked Verizon’s service more than AT&T’s.”
Regarding EMH, she added: “I generally believe in EMH, but not all the time. If I did, I wouldn’t come into work in the morning,” she said.
“I think it doesn’t account for the fact that sometimes analysts get it wrong. There’s big mass thinking out there and at times people expect the status quo to happen.”
With respect to Verizon, Caughey believes that its acquisition of Terremark has yet to be priced into its shares.
“We first need to know if the acquisition is going to close and how it will scale out,” she said. “Will Verizon go after big or small markets in the cloud computing business?”