Digital Inclusion And IoT Expansion Will Unlock New Markets

Key Takeaways

• Aggressive cost-cutting, culture shifts, and contract renegotiations are driving sustainable margin improvements and setting the stage for strong earnings growth.
  
• Leadership in IoT, digital transformation, and broadband positions Tele2 to capture high-value new business, expand margins, and accelerate recurring revenue growth.
  
• Heavy reliance on saturated core markets, rising competitive pressures, and costly investment needs threaten Tele2's profitability, cash flow, and future revenue growth.

Catalysts

Provides fixed and mobile connectivity and entertainment services in Sweden, Lithuania, Latvia, and Estonia.

• Analyst consensus expects the transformation plan to deliver moderate efficiency gains, but current results suggest Tele2's accelerated cost reductions, deep-rooted culture reset, and aggressive contract renegotiations are enabling sustainable, step-change improvements in net margins and EBITDA well ahead of expectations, setting the stage for outsized earnings growth.
  
• While the market is focused on the impact of the 5G network launch on revenue, there is significant potential for Tele2 to leverage its largest Swedish broadband reach and cross-segment integration to command premium pricing and capture substantial high-value IoT and B2B demand, which will meaningfully accelerate both top-line revenue and ARPU growth.
  
• Tele2 is uniquely positioned to benefit from the exponential growth in IoT and connected devices, thanks to its leadership in B2B and IoT segments; as enterprise digitalization gains pace across Europe, Tele2's recurring, high-margin managed services and IoT connectivity will become a structural driver underlying multi-year revenue and EBITDA expansion.
  
• The EU's push for digital inclusion and enhanced rural broadband, combined with Sweden's evolving regulatory environment on wholesale broadband access, will open substantial new market opportunities; as an agile, cost-efficient challenger, Tele2 can over-index on customer acquisition and revenue share in newly addressable segments.
  
• The company's rapid digital transformation-moving direct-to-customer, scaling e-commerce, and deploying advanced AI analytics-will sharpen customer targeting, reduce churn, and further shift acquisition to lower-cost channels, translating into persistently higher net margins and structurally improved cash conversion for future periods.

Tele2 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Tele2 compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Tele2's revenue will grow by 3.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 14.0% today to 20.6% in 3 years time.
• The bullish analysts expect earnings to reach SEK 6.7 billion (and earnings per share of SEK 9.63) by about July 2028, up from SEK 4.2 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 22.4x on those 2028 earnings, down from 25.2x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 25.3x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.91%, as per the Simply Wall St company report.

Tele2 Future Earnings Per Share Growth

Risks

• Tele2 remains highly dependent on mature, saturated markets like Sweden, making its organic revenue growth and overall financial performance particularly vulnerable to local market downturns and increasing competitive intensity.
  
• Persistent and aggressive competition, especially in Swedish prepaid and fixed broadband segments and from low-cost rivals, is forcing Tele2 to discount services and ramp up promotions, which threatens to erode average revenue per user and compress net margins.
  
• High and ongoing capital expenditure requirements, notably for 5G networks and digital transformation, coupled with further spectrum payments due later in 2025, risk sustaining downward pressure on free cash flow and reducing flexibility for shareholder returns or future investments.
  
• Sluggish economic conditions and weak consumer confidence in core markets, as indicated by elevated SME bankruptcies and dropping handset sales, may limit near-term service revenue growth and create ongoing headwinds to top-line expansion.
  
• Intensifying regulatory scrutiny and delayed reforms in broadband access, alongside structurally rising costs for content, spectrum, and network infrastructure, could squeeze sector profitability and diminish the long-term return on capital for Tele2.

Valuation

• The assumed bullish price target for Tele2 is SEK186.54, which represents two standard deviations above the consensus price target of SEK146.51. This valuation is based on what can be assumed as the expectations of Tele2'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 SEK190.0, and the most bearish reporting a price target of just SEK102.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be SEK32.4 billion, earnings will come to SEK6.7 billion, and it would be trading on a PE ratio of 22.4x, assuming you use a discount rate of 4.9%.
• Given the current share price of SEK150.75, the bullish analyst price target of SEK186.54 is 19.2% 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.