5G Adoption And Fiber Expansion Will Support Stable Long-Term Prospects

Catalysts

About Telefônica Brasil

Telefônica Brasil, which operates under the Vivo brand, provides mobile, fixed broadband, and digital services across consumer and corporate segments in Brazil.

What are the underlying business or industry changes driving this perspective?

• While accelerating 5G adoption and record postpaid net additions support continued top line expansion, the increasingly intense mobile competition and slower prepaid revenue recovery could cap future pricing power and limit mobile service revenue growth.
• Although fiber coverage now reaches more than 30 million homes with rising convergence through Vivo Total, further expansion into lower income or highly contested areas may require more aggressive promotions and heavier sales efforts, which could pressure ARPU and net margins over time.
• Despite rapid growth in B2B digital solutions such as cloud, IoT and cybersecurity, execution complexity, reliance on third party hyperscalers and the need for specialized talent may slow scale up and compress profitability in these new verticals, tempering their earnings contribution.
• While efficiencies from tower lease renegotiations and higher tenancy ratios can support cash generation, the long renegotiation cycle and dependence on counterparties may delay the full impact, which could limit near term improvements in operating cash flow and FCF margins.
• Although the migration from legacy copper to fiber and the sale of concession related real estate and copper assets should unlock cash and simplify the network, operational challenges in customer migration and timing volatility in asset disposals may constrain the pace of net income and free cash flow growth.

Assumptions

This narrative explores a more pessimistic perspective on Telefônica Brasil compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Telefônica Brasil's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.3% today to 16.3% in 3 years time.
• The bearish analysts expect earnings to reach R$9.9 billion (and earnings per share of R$3.42) by about December 2028, up from R$6.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as R$11.3 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, down from 17.7x today. This future PE is lower than the current PE for the US Telecom industry at 17.7x.
• The bearish analysts expect the number of shares outstanding to decline by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained double digit growth in higher value segments such as FTTH and postpaid mobile, combined with rising convergence through Vivo Total, could accelerate top line expansion and push total revenues well above current expectations, supporting a structurally higher share price through stronger revenue and ARPU growth.
• Rapid scaling of B2B digital services including cloud, IoT, cybersecurity and large infrastructure deals such as the Sabesp smart meter project may transform Vivo into a key enterprise digital platform, lifting the contribution of high margin, fast growing revenues and driving faster than expected earnings and EBITDA margin expansion.
• Ongoing efficiency gains in CapEx intensity, lease renegotiations and infrastructure sharing, together with BRL 4.5 billion in planned concession related asset sales, could materially improve operating cash flow and free cash flow generation, allowing higher shareholder remuneration and multiple re rating.
• Successful migration from copper to fiber, coupled with very low churn and rising take up in a still underpenetrated Brazilian broadband market, may extend Vivo's growth runway in fixed and convergent services for many years, supporting sustained net income growth and a structurally higher valuation multiple.
• Continued ESG leadership, brand strength and recognition as a top employer and sustainability benchmark could entrench competitive advantages in attracting customers, partners and talent, which would underpin durable revenue growth and resilient net margins over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Telefônica Brasil is R$31.0, which represents up to two standard deviations below the consensus price target of R$37.84. This valuation is based on what can be assumed as the expectations of Telefônica Brasil's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$50.0, and the most bearish reporting a price target of just R$31.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$60.9 billion, earnings will come to R$9.9 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 18.2%.
  
• Given the current share price of R$33.45, the analyst price target of R$31.0 is 7.9% lower. 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.