Vodafone’s share price has slumped this year on the back of lacklustre growth. Yet first quarter results published at the end of July showed that a new cost-cutting strategy might actually be working. However, running a mobile network is no easy feat, with the telecoms major beginning to upgrade some of its network in parts of the UK.
- Vodafone’s share price last traded above £1 in March.
- Telecoms major is upgrading its network in Wales and the south-west of England.
- Deutsche Bank has a 155p price target on the stock — more than double Friday’s close.
Vodafone’s [VOD.L] share price last traded above £1 a share at the start of March. Lacklustre sales growth, a decline in revenues in big European markets, and a huge debt pile have all sapped investor confidence. On Friday, the stock closed at 73.22p — a decline of 13% this year.
Yet, in first-quarter results published at the end of July, some green shoots emerged that showed the telecom giant’s cost-cutting strategy might be working.
But it’s a tricky market in which to differentiate yourself from the competition and involves heavy investment in national mobile networks. On this front, Vodafone is teaming up with Samsung [SSNLF] to deploy a new technology in parts of the UK.
Vodafone opens up for Open RAN
Vodafone is busily upgrading its network in Wales and the south-west of England. The operator has joined forces with Samsung to deploy a technology called Open Radio Access Networks (RAN), an approach to building mobile networks, in 2,500 sites across the region.
The main difference between Open RAN and traditional RAN networks is that this technology isn’t limited to a single supplier across an entire mobile site. Vodafone hopes this will lead to a more cost-effective and energy-efficient network.
“This milestone is important because it represents Open RAN replacing legacy solutions at scale in a high-capacity environment, and it sets up Vodafone UK with the flexibility to monetize their RAN better in the future,” said Joe Madden, Founder & Chief Analyst of Mobile Experts.
The switch also means that Vodafone is now replacing legacy Huawei 5G equipment from its network. The UK government had given mobile network operators until 2027 to get rid of Huawei kit following a government ban in 2020.
First quarter results show some improvement
Vodafone has invested heavily in building its fibre networks and 5G over the past few years. Yet sales growth has been relatively modest. Last year the company delivered growth of 0.3%, with revenues coming in at €45.7bn.
The first quarter (Q1) of Vodafone’s current financial year has been better. Service revenue grew 3.7% to € 10.7bn; a Bloomberg survey had predicted a 2.9% rise. The improved performance was helped by higher prices for broadband packages and customer numbers, with growth in the UK and Africa boosting sales.
A continued decline in big European markets, Germany and Italy, remains a problem, with the regions seeing a respective 1.3% and 1.6% drop-off in Q1.
Net debt stood at €33.4bn, a lofty figure that calls into question Vodafone’s equally lofty dividend. The yield stands at over 10%, according to data from Yahoo Finance.
Vodafone has acknowledged that business had worsened over time and has proposed remedies, including the reallocation of investment and job cuts. CEO Margherita Della Valle has said that up to 11,000 jobs are to go as the company seeks to regain its edge. Vodafone employs around 90,000 people globally.
Citi analysts said Vodafone’s Q1 results were “decent”, yet the company was “not out of the woods”. The analysts pointed out the Q1 and Q2 results may be “cheered” due to low expectations rather than any underlying improvement and were “likely to be enough to further support [Vodafone shares]”.
Vodafone share price forecasts
Considering the downward slide in Vodafone’s share price, will the stock ever recover?
Among the bulls is Deutsche Bank analyst Robert Grindle who has a 155p price target on Vodafone, although this is down from a previous 185p target. At the time of the revision in July, Grindle said that the telecoms major had suffered “from a series of unfortunate events with newer ones arriving before older ones see their impact fully wane”. Grindle’s target would see a 152% upside on Friday’s close.
Barclays also sees an upside in Vodafone’s share price, even if they trimmed their target 115p to 100p in August. Analysts at JP Morgan cut their price target on Vodafone shares from 95p to 93p the same month, while Berenberg maintained its ‘neutral’ stance on Vodafone to go with its 85p price target.
Time will tell if Vodafone’s share price will recover. Investors will want to see sales growth continue to head in the right direction following the improved Q1 showing, along with the company delivering on its promises to cut costs. However, running a major mobile network in Europe and Africa is never going to be cheap.
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