Saturated European Markets And Heavy CapEx Will Undermine Future Prospects

Key Takeaways

• Market saturation, rising competition, and new digital ecosystems will constrain growth and erode both market share and pricing power in core segments.
  
• High capital expenditures and escalating regulatory costs will suppress free cash flow, net margins, and reduce strategic flexibility over time.
  
• Expanding cloud, fiber, and mobile services, increasing recurring revenues, and portfolio diversification position United Internet for resilient and profitable long-term growth amid ongoing digitalization trends.

Catalysts

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

• As the broadband and mobile markets in Europe approach saturation, United Internet will likely face shrinking opportunities for customer and revenue growth, with reliance on migrating wholesale customers only masking underlying stagnation in subscriber numbers, ultimately capping long-term revenue expansion.
  
• Heavy capital expenditure requirements for 5G and fiber rollout-estimated at €800 million annually and potentially rising with large projects like the AI Gigafactory-will depress free cash flow for years and risk delivering subpar returns on invested capital, squeezing both net margins and future earnings.
  
• Intensifying competition from global hyperscalers and tech giants in core areas such as cloud, hosting, and connectivity means United Internet is at increasing risk of margin erosion and market share loss, as regional operators lack the scale and innovation budgets to compete effectively, which may cause steady ARPU declines.
  
• Mounting regulatory interventions in the EU around digital markets and privacy requirements will translate to rising compliance costs and operational burdens, eroding profitability while limiting the company's strategic flexibility and ability to scale services efficiently.
  
• The structural shift toward integrated digital ecosystems offered by dominant international conglomerates will make it difficult for United Internet to secure premium customers and maintain relevance, leading to the commoditization of hosting and internet access-pressuring pricing power and further risking a persistent decline in net income over the medium to long term.

United Internet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on United Internet compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming United Internet's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.9% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach €363.3 million (and earnings per share of €2.1) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 37.9x today. This future PE is lower than the current PE for the GB Telecom industry at 20.8x.
• 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

• Strong growth in IONOS, particularly in cloud services and AI-driven offerings, positions United Internet to benefit from secular demand for digitalization among SMEs in Europe and the US, supporting sustained revenue and margin expansion in the applications segment.
  
• Continued investment in fiber optic and mobile network infrastructure, including migration to Open RAN and expansion into 5G and next-generation broadband, is likely to improve vertical integration, reduce third-party costs, and increase recurring revenues and profitability over time.
  
• The shift from nonrecurring to recurring revenues across consumer and business segments, especially through increased conversion of free to premium subscribers, offers greater revenue stability and enhanced average revenue per user, which should improve long-term earnings quality.
  
• Management's guidance and multi-year planning indicate that indebtedness is peaking and set to decline despite ongoing investments, suggesting improved balance sheet strength and increasing free cash flow after this intensive CapEx phase.
  
• United Internet's diversified portfolio across access, applications, and cloud-combined with exposure to secular tailwinds like digital sovereignty, cybersecurity, and EU subsidy support for data infrastructure-reduces risk from market saturation and may enable resilient earnings growth into the future.

Valuation

• The assumed bearish price target for United Internet is €14.46, which represents two standard deviations below the consensus price target of €29.34. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be €6.8 billion, earnings will come to €363.3 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €27.1, the bearish analyst price target of €14.46 is 87.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.