Fiber Expansion And 5G Investment Poised To Power Future Growth

Key Takeaways

• Telefónica's network investments and strategic agreements solidify market position and future revenue prospects.
  
• Cost efficiencies and cash flow strategies enhance financial stability and earnings growth.
  
• Telefónica faces multiple challenges including currency devaluation, competitive pressure in several markets, regulatory risks, and market volatility, potentially impacting revenue, margins, and growth.

Catalysts

Provides telecommunications services in Europe and Latin America.

• Telefónica's investment in next-generation networks, including 5G reaching 71% coverage and fiber expansion to 82 million premises, provides a strong foundation for future revenue growth.
  
• The FibreCo agreement in Spain and other long-term wholesale deals enhance market stability and secure future revenue streams.
  
• The transition to an authorization model in Brazil, expected to conclude in Q4 2024, could optimize capital allocation and positively impact net margins.
  
• Cost efficiency initiatives, such as AI-driven solutions and operational simplification, are anticipated to support margin improvements and drive earnings growth.
  
• Robust free cash flow performance, with 90% growth in Q3 and effective FX hedging strategies, bolsters earnings potential and financial flexibility.

Telefónica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telefónica's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 5.3% in 3 years time.
• Analysts expect earnings to reach €2.2 billion (and earnings per share of €0.34) by about November 2027, up from €-1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.5 billion in earnings, and the most bearish expecting €1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2027 earnings, up from -17.1x today. This future PE is lower than the current PE for the GB Telecom industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 5.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Telefónica Future Earnings Per Share Growth

Risks

• The depreciation of the Brazilian real against the euro poses a significant risk to Telefónica's revenue and EBITDA growth, as foreign exchange (FX) headwinds have reduced revenue growth by 4.2 percentage points and EBITDA growth by 4.7 percentage points.
  
• Competition and strong market dynamics in Spain, particularly in the low-end market, could pressure Telefónica’s pricing strategy, potentially impacting revenue growth and net margins.
  
• Telefónica's operations in Hispam face volatility, mainly due to currency weakness in Mexico and Chile and intense competition in Chile and Peru, which resulted in a significant non-cash impairment charge. This could affect regional earnings stability and growth prospects.
  
• Changes in the German market, including tariff simplifications and aggressive broadband offers by competitors, could challenge Telefónica's ability to maintain its value-for-money leadership, potentially putting pressure on its revenue streams in this market.
  
• Regulatory risks in Brazil, particularly delays in the migration from a concession to an authorization model, may impact Telefónica’s capital allocation plans and operational efficiency, possibly affecting future earnings growth.

Valuation

• The analysts have a consensus price target of €4.27 for Telefónica 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 €5.2, and the most bearish reporting a price target of just €3.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €41.8 billion, earnings will come to €2.2 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of €4.33, the analyst's price target of €4.27 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.