Digitization And 6G Trends Will Drive Sustainable Connectivity Expansion

Key Takeaways

• Recurring profits and synergies from integration and strategic ownership position NTT for stronger, more stable net profit growth than widely expected.
  
• Leadership in advanced technologies and aggressive investment will drive margin expansion and long-term growth as demand for digital infrastructure accelerates globally.
  
• Profitability is threatened by reliance on asset sales, shrinking domestic revenues, regulatory pressures, costly infrastructure, and disruptive competition from new technologies and market entrants.

Catalysts

Operates as a telecommunications company in Japan and internationally.

• Analyst consensus expects strong results from global data center expansion, but this likely underestimates the full earnings potential as NTT's leadership and ongoing REIT strategy mean that recurring profits from both asset sales and ongoing rents could drive higher and more stable operating income growth than current forecasts suggest.
  
• While analysts broadly acknowledge the benefits of NTT DATA Group integration, the upside is greater than assumed: the move to full ownership unlocks rapid cost and revenue synergies, enabling higher net profit growth as overhead is reduced and cross-selling across enterprise and telco customers accelerates.
  
• The company's aggressive ¥8 trillion midterm investment program is set to capitalize on surging, multi-decade demand for advanced connectivity, AI, and cloud infrastructure, positioning NTT for sustained double-digit revenue growth as digital transformation and data usage accelerate across Asia and globally.
  
• NTT's first-mover advantage and ongoing dominance in proprietary optical (IOWN) and energy-efficient technologies place it at the center of the global decarbonization and 6G infrastructure upgrade cycle, setting the stage for superior margin expansion as high-value, sustainable solutions outpace legacy telecom offerings.
  
• The company's willingness and ability to pursue transformative M&A and large-scale inorganic growth-while maintaining prudent leverage through asset recycling and robust free cash flow-could lead to step-change increases in earnings per share as new high-growth domains are integrated into the platform.

Nippon Telegraph and Telephone Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on NTT compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming NTT's revenue will grow by 4.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.3% today to 9.4% in 3 years time.
• The bullish analysts expect earnings to reach ¥1478.8 billion (and earnings per share of ¥18.34) by about July 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 bullish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, up from 12.6x today. This future PE is greater than the current PE for the JP Telecom industry at 12.3x.
• 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 company's reliance on asset sales (such as converting data centers into REITs) to boost profits introduces volatility and may not be sustainable in the long term, which could negatively impact recurring earnings and lead to profit instability once these opportunities diminish.
  
• Core domestic telecom businesses are experiencing declining revenues and face stagnating profit growth due to Japan's saturated market, persistent competition, and demographic headwinds, all of which threaten the long-term trajectory of top-line revenue.
  
• NTT's large legacy infrastructure in fixed voice and copper networks requires ongoing and potentially rising maintenance and upgrade expenses, which may pressure operating margins and constrain future free cash flows as network transitions accelerate.
  
• Heightened regulatory pressure to lower mobile fees and stricter government oversight in Japan could compress net margins and limit operating flexibility, potentially eroding profitability even as the company invests in growth areas.
  
• Rapid technological advances, digital disintermediation, and competition from OTT services, cloud players, and MVNOs are eroding traditional carrier revenues and undermining NTT's traditional market roles, putting downward pressure on both revenues and long-term earnings growth.

Valuation

• The assumed bullish price target for NTT is ¥215.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NTT'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 ¥215.0, and the most bearish reporting a price target of just ¥150.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ¥15707.9 billion, earnings will come to ¥1478.8 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 4.7%.
• Given the current share price of ¥151.9, the bullish analyst price target of ¥215.0 is 29.3% 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.