Rising Data Costs And Fiber Dependence Will Pressure Margins And Earnings

Catalysts

About Swisscom

Swisscom is a telecommunications and IT services group with operations in Switzerland and Italy, offering mobile, fixed connectivity, IT, cloud, security and wholesale network services.

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

• As data traffic keeps rising and 5G plus and fiber coverage in both Switzerland and Italy move toward higher national penetration, Swisscom must keep investing heavily just to maintain network quality. This can pressure free cash flow if revenue trends in Telco services continue to show erosion.
• The shift toward value-based offers in Italy, including higher entry price points on mobile and broadband and back book to front book price alignment, could hit volumes or increase churn as customers face higher bills. This would limit the intended lift to service revenue and weigh on earnings.
• Growing reliance on wholesale fiber access revenues in both markets, with a higher share of lines on FTTH, increases exposure to potential reseller pricing pressure and contract renegotiations. This could compress access margins and slow EBITDAaL growth.
• The broad expansion into cloud, security and AI services for enterprises in Switzerland and Italy comes at a time when many export oriented Swiss corporates are cautious on ICT spending. Slower project pipelines may therefore cap IT revenue growth and dilute overall group net margin progress.
• The Italian integration and SIM migration are expected to deliver sizeable cost synergies. However, any execution issues, delays in IT or network consolidation, or weaker than planned B2C and B2B Telco service revenues would narrow the synergy benefit and keep group EBITDAaL under pressure.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Swisscom compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Swisscom's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.3% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach CHF 1.5 billion (and earnings per share of CHF 26.61) by about July 2029, up from CHF 1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CHF2.0 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 17.8x on those 2029 earnings, down from 25.6x today. This future PE is lower than the current PE for the GB Telecom industry at 25.6x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Swisscom is holding service revenue erosion in Switzerland to relatively small quarterly moves, with B2C mobile net adds broadly stable and churn at low levels of 7.7% for fixed and 6.8% for mobile. This could support a more resilient revenue base than a bearish view on long term top line pressure assumes, helping revenue and earnings.
• Wholesale and fiber are gaining traction, with Swiss wholesale access revenues reported at €50 million in the quarter compared to €48 million previously and nearly half of wholesale lines already on FTTH. This may support higher quality, higher margin access revenue and underpin EBITDAaL and cash flows.
• Cost efficiency programs in Switzerland have already reached the CHF 50 million full year savings target by Q3, with management highlighting ongoing digitisation and AI use in customer service and network simplification. These factors could limit operating expense growth and support net margins and operating free cash flow.
• In Italy, the integration of Fastweb and Vodafone is reported to be on track, with SIM migration proceeding as planned and synergy targets of CHF 200 million in 2026 reaffirmed, while B2C churn is improving and broadband net adds trends are stabilising. All of this could support a gradual recovery in service revenue and EBITDAaL rather than a sustained deterioration.
• New revenue streams in IT, cloud, security and AI, including Swiss Armed Forces cloud contracts and AI chatbot offerings for both consumers and SMEs in Switzerland and Italy, are already generating paying subscriptions and could provide incremental, higher value revenue pools that support long term growth in revenue and earnings.

Valuation

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

• The assumed bearish price target for Swisscom is CHF440.0, which represents up to two standard deviations below the consensus price target of CHF565.29. This valuation is based on what can be assumed as the expectations of Swisscom'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 CHF735.0, and the most bearish reporting a price target of just CHF440.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be CHF14.2 billion, earnings will come to CHF1.5 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 4.2%.
• Given the current share price of CHF611.0, the analyst price target of CHF440.0 is 38.9% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.