Partnerships With Telefónica And Disney+ Propel 5G And IPTV Growth, Boosting Future Earnings

Key Takeaways

• New MNO contracts and 5G capabilities drive growth, promising increased future revenue streams in the mobile segment.
  
• Strategic partnerships and IPTV subscriber growth suggest robust service revenue and long-term growth potential.
  
• Intensifying competition and execution risks, along with dependency on market conditions and regulatory uncertainty, challenge freenet’s revenue and margin stability.

Catalysts

Provides telecommunications, broadcasting, and multimedia services for mobile communications/mobile internet, and digital lifestyle sectors in Germany.

• The implementation of new MNO contracts, including 5G capabilities and new tariff plans from Telefonica, has shown strong growth in net adds, indicating a potential increase in future revenue streams.
  
• The IPTV segment is seeing significant growth with the addition of new subscribers and partnerships such as Disney+, suggesting an upward trajectory in service revenues and long-term revenue growth potential.
  
• A strategic focus on cost control and operational efficiency, with a planned annual growth in the gross profit for the Mobile segment, supports maintaining or increasing net margins over the long term.
  
• The shift to performance marketing and the potential for improved customer lifetime value management within the Mobile business indicates opportunities for stable revenue and EBITDA growth.
  
• The strong cash flow generation, supported by moderate revenue growth and disciplined financial management, positions the company for potential future earnings improvements and shareholder returns through dividends or share buybacks.

freenet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming freenet's revenue will decrease by -1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 11.9% in 3 years time.
• Analysts expect earnings to reach €311.5 million (and earnings per share of €2.71) by about December 2027, up from €275.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €254.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2027 earnings, up from 11.8x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.26%, as per the Simply Wall St company report.

freenet Future Earnings Per Share Growth

Risks

• Intensifying competition: The mention of other players, particularly in the Digital Lifestyle sector and evolving mobile market dynamics, suggests that freenet faces significant competitive pressure which could impact its ability to maintain or increase market share, leading to potential revenue and net margin challenges.
  
• Execution risks: The company's strategy involves significant change, such as shifting more focus to online sales and collaborative ventures with third-party platforms. Errors or delays in executing these strategies could impact revenue growth and margins.
  
• Contract renegotiations: Future changes or renegotiations in key contracts with MNOs and broadcasters may not be as favorable, which could potentially lead to increased costs or reduced revenue, impacting earnings.
  
• Dependency on market conditions: The success of newly launched services such as waipu.tv relies heavily on consumer uptake and market conditions which may fluctuate, potentially affecting revenue projections.
  
• Regulatory uncertainty: The court ruling over spectrum auctions still presents a potential risk. While immediate changes are not expected, future regulatory decisions could negatively impact operational costs or competitive positioning, affecting earnings.

Valuation

• The analysts have a consensus price target of €31.66 for freenet 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 €37.0, and the most bearish reporting a price target of just €25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €2.6 billion, earnings will come to €311.5 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 4.3%.
• Given the current share price of €27.32, the analyst's price target of €31.66 is 13.7% 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.