Delays And Rising Costs Will Cripple Telecom Profitability

Key Takeaways

• Large, ongoing capital and regulatory costs, along with network delays, threaten profitability and extend the period of negative financial performance.
  
• Competitive pressures and market saturation limit growth prospects, exposing 1&1 to margin erosion and increased customer churn risk.
  
• The rollout of a proprietary 5G network and advanced architecture is set to lower costs, boost margins, and strengthen 1&1's long-term competitive position.

Catalysts

Operates as a telecommunications provider in Germany.

• The rapid rollout of 1&1's proprietary network is exposing the company to sustained elevated capital expenditures as it races to meet regulatory coverage targets, while ongoing delays in site deployment (notably with Vantage Towers) and incomplete fiber backhaul connections risk further cost overruns and prolong the period of negative returns, likely depressing free cash flow and net income for several more years.
  
• As the German telecom market nears saturation and demographic growth stalls, 1&1 faces structural limitations on expanding its subscriber base, capping long-term service revenue potential and leaving the company more vulnerable to customer churn and ARPU erosion from intensifying price competition.
  
• Ongoing reliance on national roaming agreements and exposure to unfavorable contract transitions (switching from Telefónica to Vodafone) have already led to surging input costs and compressed EBITDA, with heightened risk of further margin deterioration as the company remains dependent on incumbents for critical infrastructure until its network build reaches material scale.
  
• Increasing regulatory intervention and escalating compliance costs, such as tighter oversight on spectrum allocation, sharing requirements, and stricter data privacy regulations, are expected to add persistent cost burdens, which will limit profitability and put upward pressure on operating expenses for the foreseeable future.
  
• The accelerating convergence of telecom services with digital and media offerings, largely driven by deep-pocketed Big Tech and integrated incumbents, threatens to marginalize stand-alone connectivity providers like 1&1, forcing the company to compete on price alone at a time when scale disadvantages and the need for continuous network upgrades will likely perpetuate margin pressure and challenged earnings growth.

1&1 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on 1&1 compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming 1&1's revenue will decrease by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.7% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach €142.4 million (and earnings per share of €1.12) by about August 2028, down from €151.0 million today. The analysts are largely in agreement about this estimate.
• 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 14.8x on those 2028 earnings, down from 22.0x today. This future PE is lower than the current PE for the DE Wireless Telecom industry at 17.6x.
• 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 4.76%, as per the Simply Wall St company report.

1&1 Future Earnings Per Share Growth

Risks

• The completion of 1&1's proprietary 5G network is expected to substantially reduce reliance on costly national roaming agreements, lower long-term operating expenses, and improve net margins as customers are migrated to the company's own infrastructure, directly supporting profit growth in coming years.
  
• Achieving 25% population coverage with its independent network by the end of 2025 would allow 1&1 to capture significant cost savings, estimated at around 100 million euros annually, which would materially boost EBITDA and cash flow once migration and integration are complete.
  
• OpenRAN and fully virtualized network architecture is enabling 1&1 to operate with lower power costs and greater network flexibility, potentially providing improved scalability and differentiating its offerings, which could strengthen competitive positioning and support higher margins over time.
  
• Sustained demand for broadband, fiber, and advanced mobile services, combined with award-winning customer satisfaction scores and leading regional market quality, positions 1&1 to stabilize or grow its subscriber base and service revenues as secular digitalization and IoT adoption accelerate in Germany.
  
• Once the current phase of network build-out and migration is completed, 1&1's ability to scale fixed-mobile bundled services and leverage its ecosystem of technology and wholesale partners could drive incremental ARPU increases and operating leverage, contributing to long-term growth in revenue and profitability.

Valuation

• The assumed bearish price target for 1&1 is €10.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of 1&1'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 €30.0, and the most bearish reporting a price target of just €10.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.9 billion, earnings will come to €142.4 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €18.88, the bearish analyst price target of €10.4 is 81.5% lower.
  
• 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.