FTTH Consolidation And 5G Rollout Will Empower Future Connectivity

Key Takeaways

• Leadership in fiber broadband and digital service expansion positions the company for stronger recurring revenues and long-term margin improvement.
  
• 5G rollout and growth in B2B digital solutions create opportunities for revenue diversification and future earnings growth.
  
• Persistent competition, bundled offering pressures, heavy investment needs, and macroeconomic volatility threaten margins, cash flow, and long-term revenue sustainability.

Catalysts

Operates as a mobile telecommunications company in Brazil.

• The ongoing expansion of fiber-to-the-home (FTTH) and consolidation of FiBrasil reinforce Telefônica Brasil's leadership in high-speed broadband, accelerating household penetration and supporting higher recurring revenues and margin expansion over the long term.
  
• Growth in demand for digital services, such as music and video streaming, OTT content, and the Vivo Pay digital platform, reflects rising digital adoption in Brazil and unlocks valuable new revenue streams, likely driving higher ARPU and greater monetization of the customer base.
  
• Rapid rollout and increasing adoption of 5G, now available to nearly a quarter of the mobile base in 596 cities, enable differentiated offerings and cross-selling of IoT and enterprise solutions, supporting top-line growth and future revenue diversification.
  
• Expansion of B2B digital solutions (notably in cloud, IoT, cybersecurity, and messaging) is capturing growth from Brazil's shift to more sophisticated digital payments, fintech, and the development of integrated infrastructure required for smart cities, supporting both revenue mix improvement and margin expansion.
  
• Significant untapped addressable market remains in both fiber (with potential to pass up to 60 million homes versus current penetration just above 30 million) and in digital B2B, where current customer penetration for advanced services is low, providing a long runway for future revenue and earnings growth.

Telefônica Brasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telefônica Brasil's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 14.0% in 3 years time.
• Analysts expect earnings to reach R$9.5 billion (and earnings per share of R$3.07) by about September 2028, up from R$5.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 18.5x today. This future PE is greater than the current PE for the US Telecom industry at 18.5x.
• Analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.8%, as per the Simply Wall St company report.

Telefônica Brasil Future Earnings Per Share Growth

Risks

• The company faces strong and persistent competition in both mobile and fiber segments, including from low-cost and digital-only players, which can cause pricing pressures and erode ARPU and market share over time, negatively impacting future revenue growth and net margins.
  
• The shift to bundled offerings like Vivo Total, while reducing churn, is resulting in ARPU dilution as discounts are provided to convergent customers; this trend, if it persists or intensifies, could constrain revenue per user and limit top-line growth.
  
• High and growing capital expenditure requirements for ongoing 5G and fiber expansion (with 76% of CapEx directed at these initiatives) may pose risks if revenue growth slows, potentially compressing free cash flow and limiting the company's ability to fund dividends, buybacks, or further strategic investments.
  
• Macroeconomic and regulatory uncertainties in Brazil, as well as exposure to local cost pressures such as inflation, salary readjustments, and currency volatility, can heighten operational costs and financial unpredictability, posing risks to net income and margins.
  
• The rapid adoption of OTT and digital platforms can continue to reduce reliance on traditional telecom services, leading to increased commoditization of connectivity, higher customer churn, and downward pressure on margins and long-term revenue streams.

Valuation

• The analysts have a consensus price target of R$35.593 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$42.0, and the most bearish reporting a price target of just R$28.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$67.9 billion, earnings will come to R$9.5 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 17.8%.
• Given the current share price of R$33.48, the analyst price target of R$35.59 is 5.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.