Rising European Compliance Costs Will Erode Legacy Services

Key Takeaways

• Rising regulatory and competitive pressures in Europe threaten Vodafone's profitability, pricing power, and ability to defend margins despite ongoing efficiency measures.
  
• Declining legacy service revenues, heavy investment needs, and substantial debt levels constrain financial flexibility and jeopardize free cash flow and sustainable earnings growth.
  
• Streamlined operations, strategic market focus, digital innovation, and strong performance in high-growth regions are driving improved efficiency, resilience, and long-term earnings potential.

Catalysts

Provides telecommunication services in Germany, the United Kingdom, rest of Europe, Turkey, and South Africa.

• The company's long-term growth in revenues and margins is increasingly threatened by relentless regulatory pressures in Europe around data privacy and digital taxation, which will lead to structurally higher compliance costs and expose Vodafone to the risk of material fines, thereby eroding operating profitability despite ongoing efficiency programs.
  
• Persistent shifts in consumer behavior towards alternative communication services-such as third-party messaging apps, VoIP, and emerging satellite connectivity-are expected to accelerate the decline of Vodafone's legacy voice and SMS revenues, limiting its ability to stabilize or grow top-line numbers even as new technologies are deployed.
  
• Vodafone remains burdened by a substantial debt load while simultaneously needing to outlay heavy, recurring investment for 5G-Advanced rollouts, fiber expansion, and the post-merger UK network upgrade, a cycle that risks compressing free cash flow and could force further dividend cuts or restrict investment in higher-margin diversification.
  
• In core European markets, Vodafone faces steadily intensifying price competition from local and low-cost rivals, leading to ongoing ARPU pressure and weaker net margins, as evidenced by continued discounting in Germany and only ambiguous signs of market discipline, which places mid-term EBITDA recovery at risk.
  
• The rapid commoditization of mobile services, coupled with regulatory mandates for infrastructure sharing and open access, is progressively eliminating Vodafone's traditional sources of pricing power and customer lock-in, undermining its ability to differentiate and defend margins-thus threatening sustainable earnings growth and return on capital over the next several years.

Vodafone Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Vodafone Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Vodafone Group's revenue will decrease by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -11.1% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach €1.6 billion (and earnings per share of €0.08) by about August 2028, up from €-4.1 billion 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 11.4x on those 2028 earnings, up from -6.0x today. This future PE is lower than the current PE for the US Wireless Telecom industry at 31.1x.
• Analysts expect the number of shares outstanding to decline by 6.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.89%, as per the Simply Wall St company report.

Vodafone Group Future Earnings Per Share Growth

Risks

• Vodafone's strategic asset disposals, such as the sales of Spain and Italy and the focus on core markets, have streamlined operations and strengthened its balance sheet, resulting in €2 billion returned to shareholders through buybacks and improved net cash positions, which supports future earnings and financial flexibility.
  
• The merger with Three U.K. is set to significantly enhance Vodafone's scale in its largest remaining European market, unlocking GBP 700 million in annual cost and capital expenditure synergies by the fifth year post-merger, and providing strong potential for EBITDA and free cash flow growth that could boost per share profitability.
  
• Strong and growing contributions from Africa and Turkey, as well as exposure to high-growth markets and digital financial services such as M-Pesa, provide diversified and resilient sources of revenue and free cash flow growth, supporting long-term earnings and reducing dependence on mature European markets.
  
• Substantial progress in digital transformation and customer experience, particularly evidenced by best-ever Net Promoter Scores in key markets such as the U.K. and Germany, is driving lower churn, stable or increasing market share, and improving operational efficiency, which should sustain or increase net operating margins over the long term.
  
• Continued investment in network infrastructure, advancing 5G rollout, and growing B2B and digital services offerings position Vodafone to capitalize on secular trends in data growth, digitalization, and enterprise demand, supporting steady to rising revenues and improved EBITDA margins across its diversified market portfolio.

Valuation

• The assumed bearish price target for Vodafone Group is £0.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Vodafone Group'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 £1.34, and the most bearish reporting a price target of just £0.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €34.7 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.9%.
• Given the current share price of £0.88, the bearish analyst price target of £0.6 is 47.9% 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.