IoT And Edge Computing Will Power A Digital Connectivity Revolution

Key Takeaways

• Direct network control and virtualized infrastructure will allow 1&1 to accelerate subscriber growth, raise pricing power, and generate structurally higher margins than legacy peers.
  
• Backing from regulators and innovative offerings like private 5G position 1&1 to gain market share and benefit from the digitalization trend, outpacing older competitors.
  
• Elevated churn, rising costs, and intense competition amid high investment and regulatory risks threaten profitability, margin stability, and sustainable contract growth.

Catalysts

Operates as a telecommunications provider in Germany.

• Analyst consensus expects customer stability and eventual growth post-migration, but this underestimates the potential for 1&1 to rapidly recapture and accelerate net subscriber additions, driven by pent-up demand for the improved quality and price competitiveness enabled by direct network control, likely driving a more substantial uplift in service revenue and ARPU beyond current forecasts.
  
• While analysts believe network self-build will lower costs, they may be overlooking the outsized operating leverage 1&1 gains by deploying an advanced, fully virtualized open RAN network just as demand for connected devices and data-hungry applications accelerates, which can sharply widen net margins and generate structural EBITDA upside over legacy peers.
  
• 1&1 is uniquely positioned to capitalize on the shift toward edge computing and IoT by leveraging its virtualized infrastructure and new spectrum to rapidly launch high-value services such as private 5G networks and fixed wireless for enterprises, diversifying revenue streams and boosting medium-term revenue acceleration.
  
• Deep regulatory backing for challenger brands in Germany-combined with a bold capacity expansion plan funded by favorable, long-term financing-positions 1&1 to structurally grow market share as legacy competitors are constrained by older networks and regulatory scrutiny, enabling sustained above-industry topline growth.
  
• The sustained digitalization of both consumer and enterprise behaviors will disproportionately benefit operators with ultra-modern networks, with 1&1 able to set premium pricing for advanced connectivity (e.g., guaranteed low latency for streaming and cloud) that underpins higher ARPU and long-term earnings growth.

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 7.7% in 3 years time.
• The bullish analysts expect earnings to reach €349.1 million (and earnings per share of €1.97) 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 17.4x on those 2028 earnings, down from 21.9x today. This future PE is about the same as the current PE for the DE Wireless Telecom industry at 17.4x.
• 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 company is experiencing elevated customer churn and ongoing declines in both mobile and broadband contract bases, with customer losses being exacerbated by the migration to its own network-this risks persistently lower revenues and insufficient organic contract growth, especially in the face of long-term trends toward bundled and ecosystem-based offerings from competitors.
  
• Margin pressure is mounting due to persistent reliance on wholesale network agreements during the 5G ramp-up, and the expiration of national roaming deals with Telefónica is resulting in structurally higher current service costs under the Vodafone contract, narrowing net margins and compressing EBITDA.
  
• Ongoing network rollout and migration challenges have led to much higher capital expenditures, with cash CapEx guided to rise to 450 million Euros in 2025 from 290 million in 2024, which, alongside weaker earnings and high interest and lease expenses, has already deteriorated free cash flow and profit before tax, signaling risk for future earnings and returns.
  
• 1&1 is operating in a saturated and hyper-competitive German telecom market, where aggressive promotional activity and commoditization are intensifying price-based competition; this environment threatens both ARPU levels and customer retention, driving longer-term margin compression and limiting revenue growth potential.
  
• The capital intensity of network investments alongside increased regulatory risk from European data privacy and open-access mandates are likely to drive long-term cost inflation, increase compliance expenditure, and potentially reduce the company's ability to fully monetize infrastructure investments, further weighing on profitability and net margins.

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 €349.1 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €18.72, the bullish analyst price target of €30.0 is 37.6% 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.