Investments In Fiber And 5G Will Drive Future Connectivity Expansion

Key Takeaways

• Expansion into postpaid, fiber, and B2B digital services, plus prepaid migration, hints at revenue growth by targeting higher-value customers and digital services uptake.
  
• Migrating to fiber and expanding 5G networks could reduce costs and enable growth, enhancing net margins and capitalizing on connectivity demands.
  
• Continued revenue growth is challenged by intense competition, macroeconomic uncertainties, significant CapEx, and reliance on price increases, impacting long-term earnings stability.

Catalysts

Operates as a mobile telecommunications company in Brazil.

• Vivo's shift in revenue mix towards postpaid, fiber, and B2B digital services, along with prepaid to postpaid migration, suggests potential for revenue increases as the company capitalizes on higher-value customers and digital service adoption.
  
• The fixed voice migration process, moving customers from copper to fiber, could decrease operational costs significantly, potentially improving net margins by reducing expensive legacy infrastructure maintenance costs.
  
• Expansion of fiber operations and increased penetration, with a focus on high-speed internet services, indicates potential for increased revenue from broadband offerings while possibly enhancing operating margins due to higher customer retention.
  
• The continued growth in B2B digital services, including cloud solutions partnership with major providers, suggests potential for accelerating revenue growth in this segment, supporting overall earnings enhancement.
  
• Vivo's extensive investment in expanding 5G and fiber networks positions the company to capture future growth opportunities in connectivity, potentially boosting overall earnings and free cash flow as these technologies become more essential for consumers and businesses.

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 9.9% today to 12.7% in 3 years time.
• Analysts expect earnings to reach R$8.4 billion (and earnings per share of R$6.27) by about March 2028, up from R$5.5 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 17.3x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the US Telecom industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

Telefônica Brasil Future Earnings Per Share Growth

Risks

• The shift to digital services and B2B solutions, while positively contributing to current revenues, may not have stable long-term margins due to intense competition and technological changes that necessitate continued investment, impacting future earnings.
  
• The company's CapEx intensity, though decreasing, remains significant, partially due to the necessary expansion of 5G and fiber operations, which could pressure margins if revenue growth does not keep pace, affecting net earnings.
  
• The reliance on continued price increases across their hybrid and postpaid mobile segments to maintain revenue growth may face consumer resistance, impacting the ability to sustain current revenue growth levels.
  
• Despite strong performance indicators, the company acknowledges macroeconomic uncertainties that could impact customer spending and the financial health of Vivo if Brazil's economic conditions do not improve or worsen, affecting overall revenue stability.
  
• The accelerated migration from copper networks requires significant operational efforts and investments, with associated inherent risks around customer retention and acquisition of new clients, potentially impacting revenue and operating cash flow projections.

Valuation

• The analysts have a consensus price target of R$58.4 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$43.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$65.8 billion, earnings will come to R$8.4 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 16.9%.
  
• Given the current share price of R$48.94, the analyst price target of R$58.4 is 16.2% 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.