5G Expansion And Fiber Revolution Catalyze Revenue Growth And Margin Expansion

Key Takeaways

• Expansion of 5G and fiber networks is set to boost revenue and margins through increased penetration and upselling opportunities.
  
• New service verticals and operational efficiency improvements are expected to enhance revenue streams, earnings, and shareholder returns.
  
• Price competition, high investment needs, and legacy revenue decline pose challenges to Vivo's revenue growth and margins.

Catalysts

Operates as a mobile telecommunications company in Brazil.

• The expansion of 5G coverage reaching nearly 400 cities and 57% of Brazil's population is expected to drive future mobile service revenue growth as more customers transition to higher ARPU 5G services.
  
• Growth in fiber connections, having reached 28.3 million homes with a target of 29 million by the end of the year, is likely to enhance revenue and net margins due to increased penetration and upselling opportunities with convergent offers.
  
• The significant growth in B2B digital services, now representing a considerable portion of Vivo's revenue, presents opportunities for further revenue expansion given only 15% of B2B customers currently acquire digital services from Vivo.
  
• The introduction and expansion of new service verticals such as financial services, health, and wellness are expected to drive additional revenue streams from B2C customers, increasing overall revenue and improving net income.
  
• The company's focus on operational efficiency, as evidenced by maintaining flat CapEx while growing operating cash flow, suggests that earnings and free cash flow are likely to improve, allowing for increased shareholder returns and margin expansion.

Telefônica Brasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telefônica Brasil's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 12.8% in 3 years time.
• Analysts expect earnings to reach R$8.5 billion (and earnings per share of R$5.32) by about November 2027, up from R$5.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2027 earnings, up from 15.8x today. This future PE is lower than the current PE for the US Telecom industry at 19.1x.
• Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.64%, as per the Simply Wall St company report.

Telefônica Brasil Future Earnings Per Share Growth

Risks

• The entry of new competitors offering lower price points in controlled plans may impact Vivo's ability to maintain pricing power, potentially affecting revenue growth and net margins.
  
• Increased lease expenses observed in the third quarter could remain volatile, posing a risk to future cash flow and EBITDA if not managed effectively.
  
• The company's continued investment requirements in fiber and 5G deployment could strain cash flow and limit its ability to reduce CapEx intensity promptly, impacting long-term earnings growth.
  
• Vivo's capability to migrate prepaid customers to higher ARPU postpaid plans may face challenges if market demand or strategies shift, which could negatively impact revenue growth.
  
• The pace of legacy fixed revenue decline may decelerate insufficiently to counterbalance low-margin segments, risking potential net margin compression as these revenues wind down.

Valuation

• The analysts have a consensus price target of R$60.44 for Telefônica Brasil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$66.0, and the most bearish reporting a price target of just R$49.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$66.7 billion, earnings will come to R$8.5 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 16.6%.
  
• Given the current share price of R$52.0, the analyst's price target of R$60.44 is 14.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.