5G And Fiber Rollouts Will Expand Digital Markets

Key Takeaways

• Heavy investment in networks and successful customer migration aim to boost future margins, reduce reliance on partners, and improve cost structure and earnings stability.
  
• Strong performance in cloud, hosting, and business applications segments supports a larger, more stable revenue base and opportunities for value creation through portfolio optimization.
  
• Heavy investment in network infrastructure and rising competition threaten margins, cash flow, and earnings, while elevated customer churn and working capital risks could limit future growth.

Catalysts

Through its subsidiaries, operates as an Internet service provider worldwide.

• Heavy ongoing investment in fiber and 5G network rollouts is currently depressing free cash flow and earnings due to high CapEx and D&A charges, but this is set to drive future revenue growth and margin expansion as operating leverage increases, customer retention improves, and reliance on wholesale partners is reduced.
  
• IONOS's position as a leading cloud and hosting provider makes it well-placed to benefit from accelerating adoption of digital services and cloud migration among SMEs in Europe, supporting a growing, sticky revenue base and higher group earnings stability.
  
• Strong growth in the Business Applications segment, with particular momentum in international contracts and AdTech, points to an expanding total addressable market linked to businesses' growing data, connectivity, and digital marketing needs, supporting sustained consolidated revenue growth.
  
• Anticipated completion of customer migration to the new 1&1 mobile network by the end of 2025 should reduce churn, improve customer experience, and enable more efficient cost structure-positively impacting net margins and EBITDA from 2026 onward.
  
• Potential asset monetization (e.g., energy business sale) and ongoing portfolio optimization could unlock shareholder value, strengthen the balance sheet, and enhance future return on equity and earnings per share.

United Internet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Internet's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.8% today to 8.4% in 3 years time.
• Analysts expect earnings to reach €586.8 million (and earnings per share of €2.13) by about July 2028, up from €-52.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €254.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from -83.4x today. This future PE is lower than the current PE for the GB Telecom industry at 21.3x.
• 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.

United Internet Future Earnings Per Share Growth

Risks

• Persistent heavy capital expenditures for fiber optic and 5G rollouts are leading to declining free cash flow (from €142.9m to -€165.8m YoY), increased net debt (8.8% higher YTD), and significant pressure on net margins and earnings, potentially constraining dividend capacity or shareholder returns over the long term.
  
• Ongoing customer churn-especially during the migration to the new 1&1 mobile network-has already resulted in a 40,000 contract loss in Consumer Access in Q1 2025, indicating heightened execution risk and the potential for declining or stagnant service revenues if churn remains elevated.
  
• Significant EBIT decline (-12.9% YoY) and decreased EPS (from €0.35 to €0.31) are being driven by increased depreciation & amortization from network investments, highlighting the risk that cost savings and margin uplift from these investments may fail to materialize as expected, thereby pressuring group earnings and return on capital in coming years.
  
• Ongoing industry commoditization is reflected in flat service revenues, falling hardware sales, and exposure to low-margin smartphone sales, underscoring the risk that rising competition and price wars will further erode net margins and long-term revenue growth.
  
• The increasingly negative free cash flow, reliance on short-term invoice timing, and rising inventory levels signal growing working capital risks and balance sheet fragility, which-if not reversed-could limit United Internet's financial flexibility and ability to invest for future growth.

Valuation

• The analysts have a consensus price target of €28.2 for United Internet 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 €42.0, and the most bearish reporting a price target of just €13.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.0 billion, earnings will come to €586.8 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 4.7%.
• Given the current share price of €25.1, the analyst price target of €28.2 is 11.0% 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.