Explosive Data Consumption And 5G Rollout Will Fuel Market Leadership

Key Takeaways

• Leading network quality, rapid migration, and satisfied customers could accelerate service revenue and ARPU growth through improved subscriber momentum and lucrative cross-selling.
  
• Technological advantages, regulatory support, and a strong multi-segment ecosystem position the company for superior margins, market share gains, and reduced churn.
  
• Slow 5G rollout, operational challenges, competitive pricing pressures, high investment needs, and industry shifts threaten 1&1's profitability, cash flow, and long-term growth prospects.

Catalysts

Operates as a telecommunications provider in Germany.

• Analyst consensus expects stabilization post-migration, but with 1&1's migration already nearing completion and supported by exceptional customer satisfaction and network quality scores, subscriber momentum could snap back faster than expected, driving outsized service revenue and ARPU gains earlier than anticipated.
  
• While analysts broadly agree network buildout and Open RAN deployment will lower costs and improve margins, the company's aggressive use of full fiber connectivity, real-time data processing, and 10-30% lower power consumption versus peers could drive a step-change in net margin uplift and long-term earnings, potentially exceeding consensus expectations as energy savings compound and scale ramps.
  
• The company's leadership in virtualized, flexible, and cloud-based network architecture positions it to rapidly capture incremental share as surging demand for advanced applications-such as IoT, AR/VR, and edge cloud-drives an industry need for real-time, low-latency capabilities, boosting future service revenue and ARPU well above sector averages.
  
• 1&1's strong brand, best-in-class customer satisfaction, and multi-segment ecosystem spanning broadband, mobile, and digital services allow for lucrative cross-selling and bundling opportunities, significantly reducing churn and enhancing earnings visibility through higher recurring revenue.
  
• Imminent regulatory action on tower access (Vantage Towers) and spectrum allocation, together with a pro-competition policy climate, will not only unlock accelerated network expansion and reduce excessive third-party fees more quickly than expected but may also open the door for 1&1 to win aggressive new entrants and high-value B2B clients, supporting top-line growth and EBITDA outperformance.

1&1 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on 1&1 compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming 1&1's revenue will grow by 3.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.7% today to 7.8% in 3 years time.
• The bullish analysts expect earnings to reach €350.0 million (and earnings per share of €1.98) by about August 2028, up 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 bullish analyst cohort, the company would need to trade at a PE ratio of 17.3x 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

• Ongoing execution risk is evident in 1&1's slower-than-planned 5G network buildout and frequent delays in acquiring and activating transmission sites, which continues to extend reliance on expensive roaming agreements, leading to suppressed EBITDA and delayed return to positive cash flows.
  
• Continued customer churn and stagnant contract numbers during the transition from virtual operator to direct network provider, compounded by brand repositioning challenges and service disruptions during migration, threaten recurring service revenues and earnings visibility in the longer term.
  
• Persistent intense price competition-driven by established incumbents and recent aggressive price reductions by competitors like Telefonica-pressures ARPU and gross margins, putting structural downward pressure on revenues and net margins as 1&1 tries to avoid further losses of subscribers.
  
• High ongoing network capex and regulatory burdens, including capital-intensive spectrum purchases and compliance with evolving data localization and ESG requirements, risk straining free cash flow and limiting agility in capital allocation for future growth.
  
• Structural shifts in the industry, such as stagnating subscriber growth in a saturated German market and the rise of disruptive technologies like eSIMs and direct-to-consumer connectivity, threaten to erode 1&1's long-term addressable market and diminish future revenue potential.

Valuation

• The assumed bullish price target for 1&1 is €30.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €4.5 billion, earnings will come to €350.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €18.88, the bullish analyst price target of €30.0 is 37.1% 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.