Rising Capital Expenditures And Japan's Aging Market Will Pressure Performance

Key Takeaways

• Reliance on asset sales and exposure to Japan's demographic decline threaten future profit stability and constrain long-term revenue growth.
  
• Rising investment costs, intense competition, and uncertain integration benefits jeopardize margins and sustainable earnings.
  
• A focus on high-growth digital services, effective capital returns, and technological innovation positions NTT for sustained earnings growth and resilient shareholder value.

Catalysts

Operates as a telecommunications company in Japan and internationally.

• The sustainability of recent profit growth is in question, as NTT's increase in operating profit has relied heavily on selling data center assets into REITs, a process which management has admitted is difficult to maintain at current scale going forward. This dependence risks future earnings volatility and could lead to sharp declines in operating profit once asset sales moderate or cease.
  
• NTT remains heavily exposed to Japan's demographic headwinds, with a shrinking and aging population constraining the domestic customer base for core telecom services. This structural decline poses significant, long-term limitations to revenue growth, especially since more than 80 percent of profits are derived from traditional telecommunications.
  
• Mounting capital expenditures for next-generation network upgrades, fiber rollout, and digital transformation-estimated at roughly 8 trillion yen in announced growth investments-place ongoing pressure on net margins and free cash flow. If these investments fail to produce commensurate returns, future profitability will deteriorate as debt loads and depreciation expenses rise.
  
• Heightened industry competition, both from traditional rivals and non-traditional players leveraging over-the-top platforms, is eroding average revenue per user and putting persistent pressure on pricing. Combined with regulatory efforts to lower consumer bills, this trend will continue to compress margins and undermine long-term earnings quality.
  
• Efforts to extract synergies and drive future growth through the integration of NTT DATA as a wholly owned subsidiary remain speculative and uncertain, with management unable to quantify either revenue or cost synergies. This raises the risk that expected boosts to long-term revenue and profits could fail to materialize, leaving the company with higher leverage and few viable paths to sustainable earnings growth.

Nippon Telegraph and Telephone Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nippon Telegraph and Telephone compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nippon Telegraph and Telephone's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.3% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach ¥1122.2 billion (and earnings per share of ¥14.13) by about June 2028, up from ¥1000.0 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 12.1x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the JP Telecom industry at 13.3x.
• Analysts expect the number of shares outstanding to decline by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.67%, as per the Simply Wall St company report.

Nippon Telegraph and Telephone Future Earnings Per Share Growth

Risks

• The persistent and growing demand for data centers, cloud computing, and digital transformation solutions was evident in NTT's Global Solutions segment revenue growth, supported by strong DX demand and expansion of data center engineering, pointing to long-term top line stability and upside.
  
• Ongoing investment in high-growth areas such as Smart Life services, enterprise IT, and next-generation network infrastructure demonstrates the company's strategic orientation towards higher-margin businesses, increasing the potential for medium
• to long-term earnings growth and net margin improvement.
  
• NTT's continued ability to raise dividends for fifteen consecutive years, along with active share buyback programs, suggests strong and stable cash flow generation, which underpins robust shareholder returns and supports long-term valuation.
  
• The management's flexibility and intent to revisit its Medium-Term Strategy-especially with respect to integrating NTT DATA, accelerating synergies, and optimizing business structure-could enhance operational efficiency and revenue diversification, mitigating the risk of stagnation.
  
• NTT's leadership in R&D, including advancements in optical networking, AI, cybersecurity, and ongoing development of new technologies, positions the company to capture future growth opportunities in global digital infrastructure, which could boost both revenue and profit margins over time.

Valuation

• The assumed bearish price target for Nippon Telegraph and Telephone is ¥150.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nippon Telegraph and Telephone'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 ¥215.0, and the most bearish reporting a price target of just ¥150.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥14603.7 billion, earnings will come to ¥1122.2 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 4.7%.
  
• Given the current share price of ¥158.5, the bearish analyst price target of ¥150.0 is 5.7% 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.