Accelerated 5G And IONOS Cloud Will Fuel Digital Transformation

Key Takeaways

• Growing demand for sovereign cloud and premium accounts, combined with operational improvements, is set to dramatically boost profit margins and recurring revenue quality.
  
• Integrated digital services and financial strength position United Internet for sustained cross-segment growth and strategic expansion as digitalization accelerates.
  
• Weak 5G rollout, intensifying competition, regulatory pressures, and reliance on incumbents all threaten profitability, growth prospects, and undermine differentiation in both connectivity and cloud segments.

Catalysts

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

• While analyst consensus expects margin and earnings improvements from the 5G/Open RAN and fiber rollout, the pace and scale of own-network customer migration, combined with the end of €260 million per year in contingent payments and steadily rising recurring revenues, could drive a far more dramatic and sustained increase in net margins and free cash flow than currently modeled, especially as Versatel nears self-funding and additional cost takeout is realized from enhanced operational leverage.
  
• Analysts broadly agree on the strong positioning of IONOS and cloud amid European data sovereignty trends, but this may understate the impact of a coming inflection: As public sector digitalization, AI adoption, and independent cloud mandates accelerate, United Internet's sovereign, locally-controlled cloud could capture significantly outsized European B2B and public sector workloads-unlocking structurally higher ARPU, multi-year contract wins, and double-digit, high-margin revenue growth.
  
• The ongoing and accelerating shift from free to premium (paid) consumer accounts-where paid users generate roughly ten times the ARPU of free users-combined with improved cross-sell from security, AdTech, and digital infrastructure offerings, is poised to trigger a step change in revenue quality and profit stability that is not yet fully reflected in earnings forecasts.
  
• Unique to United Internet is the breadth of its integrated German and international footprint across SME cloud, high-speed access, hosting, and security, positioning the group as a rare one-stop shop for converged digital infrastructure as IoT device counts surge and SMEs demand multi-service bundled solutions; this enables above-average customer stickiness, ARPU expansion, and sustained cross-segment growth.
  
• With over 10% of its own shares held in treasury, a strong balance sheet, and clear deleveraging set to follow capex normalization, United Internet has considerable firepower for further accretive buybacks or targeted acquisitions just as sector digitalization accelerates-thus offering significant upside potential to EPS and long-term shareholder returns.
  

United Internet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on United Internet compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming United Internet's revenue will grow by 5.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.9% today to 10.0% in 3 years time.
• The bullish analysts expect earnings to reach €764.0 million (and earnings per share of €3.25) by about September 2028, up from €123.7 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 10.9x on those 2028 earnings, down from 37.6x today. This future PE is lower than the current PE for the GB Telecom industry at 21.0x.
• 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.

United Internet Future Earnings Per Share Growth

Risks

• United Internet's lagging 5G rollout and delayed CapEx investments compared to larger rivals risks persistent customer churn and weak revenue growth, as reflected by a year-on-year reduction in broadband customers and continued investment drain impacting both top-line and profitability.
  
• Intensifying competition in German fiber broadband and ongoing price wars threaten to structurally cap average revenue per user and compress EBITDA margins, making it harder for United Internet to achieve meaningful margin expansion or grow earnings in its mature access business.
  
• Growing dominance of hyper-scaled US cloud and application providers, coupled with slow platform consolidation at IONOS and unclear differentiation, could erode market share and put ongoing pressure on net margins, especially as European players face greater customer churn and margin squeeze.
  
• Rising regulatory and compliance requirements around data privacy and sovereign data laws in Europe could increase operational costs and reduce profitability, as United Internet's cross-border applications and cloud segments must adapt to complex, evolving legal demands.
  
• Heavy dependence on regulated wholesale access to incumbent telecom networks restricts United Internet's competitive flexibility, and any future increase in access fees or tightening of regulation could directly compress net margins and reduce earnings growth.

Valuation

• The assumed bullish price target for United Internet is €42.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of United Internet'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 €42.0, and the most bearish reporting a price target of just €13.9.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €7.6 billion, earnings will come to €764.0 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 4.8%.
• Given the current share price of €26.88, the bullish analyst price target of €42.0 is 36.0% 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.