Fiber And AI Initiatives Will Strengthen Operational Efficiencies

Key Takeaways

• Deutsche Telekom's investments in fiber and T-Mobile US stake can drive future revenue growth and earnings improvements.
  
• Strategic focus on AI and ESG efforts may enhance operational efficiencies and net margins.
  
• Intense competition, inflation, and foreign exchange volatility could hamper Deutsche Telekom's revenue growth and margins, especially in the German fixed-line and mobile markets.

Catalysts

Provides integrated telecommunication services worldwide.

• Deutsche Telekom's investments in fiber, mobile technology leadership, and customer service enhancements are still in their early stages, indicating potential for future revenue growth.
  
• The company's increasing stake in T-Mobile US, including a recent increase to 51.5%, may facilitate further synergy realizations and improvements in earnings.
  
• The continued strong performance and positive outlook for T-Mobile US, particularly its leadership in network quality and postpaid net adds, could drive service revenue and core EBITDA growth.
  
• Deutsche Telekom's strategic emphasis on AI to optimize workflows and services suggests potential improvements in operating efficiencies, which could enhance net margins.
  
• On the ESG front, reduced energy consumption and CO2 emissions despite increasing data usage reflect efficiency gains that could positively impact future operational costs, contributing to net margin improvements.

Deutsche Telekom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Telekom's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.5% today to 8.5% in 3 years time.
• Analysts expect earnings to reach €10.8 billion (and earnings per share of €2.32) by about May 2028, down from €11.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €12.2 billion in earnings, and the most bearish expecting €9.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, up from 13.8x today. This future PE is lower than the current PE for the GB Telecom industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.55%, as per the Simply Wall St company report.

Deutsche Telekom Future Earnings Per Share Growth

Risks

• The intense competitive environment in Germany, particularly in mobile and fixed line, may limit Deutsche Telekom's ability to maintain or increase its market share, potentially impacting revenue growth and earnings.
  
• Inflationary pressures, such as wage increases, could contribute to cost inflation, impacting net margins unless offset by sufficient revenue growth or cost-saving measures.
  
• The challenges in increasing broadband penetration, particularly in the German fixed-line market, could affect revenue growth if not effectively addressed through acceleration of fiber uptake and improved broadband performance.
  
• Foreign exchange volatility, such as the impact of a strong U.S. dollar, could have negative effects on the company's financial results, impacting reported earnings and net debt levels.
  
• High competition from low-cost broadband alternatives and the slower overall market growth in the fixed-line segment in Germany could constrain revenue growth and make it challenging to achieve expected earnings from this segment.

Valuation

• The analysts have a consensus price target of €37.674 for Deutsche Telekom 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 €43.0, and the most bearish reporting a price target of just €31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €127.5 billion, earnings will come to €10.8 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 4.6%.
• Given the current share price of €31.6, the analyst price target of €37.67 is 16.1% 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.