Proprietary 5G Network Expansion Will Strengthen European Digital Connectivity

Key Takeaways

• Transition to an independent 5G network will reduce long-term costs, improve margins, and boost future earnings despite short-term churn and elevated expenses.
  
• Rising data demand and regulatory support for local infrastructure will expand 1&1's market share and revenue potential, enhancing its competitive and financial stability.
  
• Competitive pressures, network transition hurdles, rising costs, and demographic stagnation threaten 1&1's revenue growth, profitability, and subscriber base stability.

Catalysts

Operates as a telecommunications provider in Germany.

• The ongoing migration of mobile customers from wholesale agreements to 1&1's own independent 5G network is causing temporary churn and elevated costs in the near term; however, completion and scaling of the proprietary network will significantly reduce reliance on higher-cost wholesale arrangements, lower long-term cost of goods sold, support higher net margins, and drive future EBITDA expansion.
  
• Accelerated growth in data consumption and demand for connectivity across Europe, fueled by digitalization and the proliferation of connected devices and IoT, is set to expand the addressable market for 1&1, supporting stable or rising ARPU and long-term revenue growth potential.
  
• As 1&1 achieves greater network coverage-with targets like 25% coverage and rapid site activation on track-regulatory and investor preference for locally controlled, independent infrastructure positions the company to gain market share as a national champion amidst ongoing regulatory pushes for digital sovereignty, supporting medium
• to long-term revenue and market share gains.
  
• Back-loaded capital expenditure for network rollout in 2025 is temporarily pressuring free cash flow and earnings, but provides a strong foundation for future operating leverage as depreciation declines and migration-related costs fall away after 2026, directly improving net margins and free cash flow conversion.
  
• The company's sustained cost discipline and digital-first infrastructure provide structural operating efficiencies relative to incumbent telcos, enabling 1&1 to better withstand competitive pressures on pricing and protect long-term earnings and margin resilience as revenue diversifies and scales.

1&1 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming 1&1's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.9% in 3 years time.
• Analysts expect earnings to reach €249.5 million (and earnings per share of €1.37) by about July 2028, up from €177.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €315 million in earnings, and the most bearish expecting €128.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 18.4x today. This future PE is about the same as the current PE for the DE Wireless Telecom industry at 15.5x.
• 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 4.73%, as per the Simply Wall St company report.

1&1 Future Earnings Per Share Growth

Risks

• Intensifying competition in both mobile and broadband markets-highlighted by aggressive promotions and discount offers from competitors like Telefónica and Ebara-has contributed to declining contract bases and may pressure 1&1 to lower prices or risk higher churn, negatively impacting long-term revenue growth and ARPU (Average Revenue Per User).
  
• Ongoing migration of mobile customers to 1&1's own network is resulting in temporarily higher churn and contract losses; if churn remains elevated or contract losses persist longer than expected, this could structurally shrink the company's subscriber base, directly suppressing revenue and future net earnings.
  
• Elevated and increasing capital expenditure, particularly for the rollout of their mobile network (expected at €450 million for 2025, up from €290 million in 2024), combined with rising operating expenses (higher cost of sales and network servicing), is constraining free cash flow and compressing net margins, raising concerns about long-term profitability and the ability to fund growth or return capital to shareholders.
  
• Heavy reliance on third-party wholesale agreements (e.g., current migration from Telefónica to Vodafone) exposes 1&1 to ongoing cost volatility; the shift to the Vodafone contract, which lacks one-off payments and instead increases recurring service costs, may result in less predictable earnings and lower EBITDA in the medium term.
  
• Demographic stagnation in Germany and other core European markets, coupled with declining demand for low-margin devices and limited broadband subscriber growth, may restrict the company's addressable market and cap long-term revenue expansion, exacerbating the financial headwinds from sector and company-specific challenges.

Valuation

• The analysts have a consensus price target of €19.14 for 1&1 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 €30.0, and the most bearish reporting a price target of just €10.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.2 billion, earnings will come to €249.5 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 4.7%.
  
• Given the current share price of €18.5, the analyst price target of €19.14 is 3.3% 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.