5G Build-Out And OpenRAN Will Empower Next Gen Connectivity

Key Takeaways

• Reduced reliance on third-party networks, network buildout, and strategic partnerships will bolster margins, cash flow, and future revenue growth prospects.
  
• Regulatory support and investment in advanced infrastructure position 1&1 to capture premium revenue as demand for high-speed connectivity and bundled services rises.
  
• Heavy investment, operational delays, and fierce competition in a saturated market threaten 1&1's margins, growth prospects, and ability to improve earnings in the near future.

Catalysts

Operates as a telecommunications provider in Germany.

• Completion of customer migration onto 1&1's own network and continued 5G buildout will substantially reduce dependence on costly national roaming agreements, driving material long-term improvements in gross margin and EBITDA as more traffic is shifted onto owned infrastructure.
  
• As consumer and business demand for data connectivity and speed increases (due to IoT, remote work, AR/VR, and cloud adoption), 1&1's investments in a next-gen, fully virtualized OpenRAN network with superior energy-efficiency and low latency should enable ARPU stabilization and revenue growth, especially as high-speed services can command premium pricing.
  
• Strategic partnerships for fiber access and expanded broadband footprint (notably with Deutsche Glasfaser and others) allow 1&1 to quickly scale, supporting top-line expansion as digitization and convergence trends drive higher broadband adoption and bundled service uptake.
  
• Regulatory actions-such as the Federal Network Agency mandating spectrum access and encouraging competition-provide 1&1 with structural tailwinds to expand coverage, accelerate network deployment, and negotiate favorable terms, positively impacting both long-term revenue and margin outlook.
  
• Ramp-down in extraordinary migration and network startup costs combined with the cessation of upfront roaming payments as build-out progresses will free up cash flow and improve net income, supporting a financial turnaround that the market may not fully appreciate in the current valuation.

1&1 Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming 1&1's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.9% in 3 years time.
• Analysts expect earnings to reach €226.5 million (and earnings per share of €1.26) by about July 2029, up from €136.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €309.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 23.1x on those 2029 earnings, down from 25.8x today. This future PE is greater than the current PE for the DE Wireless Telecom industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.26%, as per the Simply Wall St company report.

Risks

• Execution risk and high capital expenditures associated with the ongoing rollout of 1&1's OpenRAN-based mobile network may continue to weigh heavily on free cash flow, pressure margins, and delay the realization of significant EBITDA and net profit improvements over the next several years.
  
• Persistent dependence on roaming agreements (currently with Vodafone, previously Telefónica), due to delays in activating their own sites and complications in receiving promised antenna sites from partners like Vantage Towers, exposes 1&1 to unpredictable and elevated network costs, which limits visibility on net margins and earnings.
  
• Weak revenue growth and customer contract stagnation-evidenced by recent declines in broadband contracts, unchanged mobile contract base, and shrinking hardware sales-highlight difficulties in scaling in a saturated, competitive German telecom market and may constrain long-term topline growth prospects.
  
• Intensifying price competition (e.g., recent aggressive price cuts by Telefónica) and an unwillingness to reduce prices to defend market share suggest 1&1 could either see further customer losses or margin compression, directly threatening recurring revenues and shareholder returns.
  
• Ongoing industry consolidation among larger European telecom incumbents, coupled with slowing demographic growth and regulatory ambiguities around network access, could undermine 1&1's bargaining position, increase operational complexity, and cap long-term growth opportunities, impacting both revenue and profit forecasts.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €25.28 for 1&1 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 €30.0, and the most bearish reporting a price target of just €18.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €4.6 billion, earnings will come to €226.5 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 5.3%.
• Given the current share price of €19.96, the analyst price target of €25.28 is 21.0% 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.