Vodafone

Vodafone's first-quarter results were positive, with adjusted EBITDAaL up 6.2% year on year and management guiding toward the higher end of its EUR 13.0 billion-EUR 13.3 billion adjusted EBITDAaL guidance.

Why it matters: We were surprised not to receive any update on Vodafone’s new anchor shareholder Vega, owned by Xavier Niel, which was the basis for our recent fair value estimate increase to GBX 130—on the assumption that Niel’s team will help drive further cost and operational efficiencies. With no earnings call this quarter, it remains unclear whether there has been any initial contact between Niel’s team and the board of directors and management. Back in May, Vodafone launched a EUR 1 billion net cost-reduction program. The next quarterly results in September should provide the first window into how absolute cost reductions are progressing, as Vodafone just reports its full financials twice a year. In our opinion, cost reductions have been underwhelming over the past three years.

The bottom line: We maintain our GBX 130 fair value estimate per share for no-moat Vodafone. Shares rose 4% to GBX 119 following the results and look slightly undervalued. Our GBX 130 fair value estimate implies a 4.4 times forward EBITDAaL multiple. While Vodafone arguably deserves a below-average multiple versus peers given its conglomerate nature, the cheap valuation looks undemanding if operational change would occur. Should Xavier Niel’s team become operationally involved and drive additional cost-cutting beyond Vodafone’s current efficiency program, we see further upside to our fair value estimate. For a long overview on our previous update, please read our note, “Vodafone: Xavier Niel Is the Catalyst We’ve Looked For; FVE Raised to GBX 130; Shares Undervalued.”

Our fair value estimate for Vodafone ADR shares is $17 per share.

We model flat sales for Vodafone over the next 10 years, due to the overall pricing pressure of the telecommunications sector, where high competition and a challenging regulatory environment weigh on firms. We model flat adjusted EBITDAaL margins long-term, as revenue pressures are offset by cost controls. In our view, the arrival of Xavier Niel (Iliad) as an anchor shareholder brings potential to unlock shareholder value through cost controls and make Vodafone more efficient. Niel and its team have deep operational knowledge in operating telecoms cost-efficiently, and we expect they will push for operational changes. We model 29.5% adjusted EBITDAaL margin in our terminal year, flat versus our 29% expectation for 2027 but higher than our previous 27.5%.

From a geographical perspective, we expect flat to low-single-digit revenue declines in all of Vodafone's European markets, which will be offset by low to mid-single-digit growth in African countries. In Germany, Vodafone keeps losing fixed-line subscribers to Deutsche Telekom, which is hurting its top line. Recovering subscribers will be a delicate balancing act for Vodafone. If Vodafone is too aggressive with promotions and discounts to regain customers, it can undermine the very revenue trajectory it is trying to protect. A gradual approach is the only credible path, but it is a slow one.

We model flat capital spending in the medium term, remaining at around EUR 8 billion-EUR 8.5 billion annually, including spectrum. Vodafone has significant equity stakes in tower firms Vantage Towers, Inwit, and Cornerstone.

We assign Vodafone a no moat rating. Vodafone's returns on invested capital are below its cost of capital. Given the highly competitive nature of the industry, we have little certainty that the company will be able to consistently generate excess ROICs over the next 10 years.

Mobile and fixed-line telecom services are generally commodity products with little differentiation. European telecom markets are mature, no-growth markets, meaning the overall profit pool that companies fight for is stable or declining. Although fixed-line and wireless networks naturally present efficient scale characteristics, this moat source has eroded in Europe due to network duplication, irrational behavior, and a poor regulatory setup. European telecoms normally don’t generate excess returns on invested capital, and when they do, the durability of these returns is uncertain due to low differentiation, aggressive competition from low-cost providers, and regulation.

In mobile networks, the collaboration between European operators has historically been low. Instead of reaping the economies of scale of deploying a unique tower where several mobile network operators can place radio equipment, most European operators opted for their own infrastructure, resulting in higher duplication and capital expenditures. Cross-country efficiencies are very low due to separate spectrum auctions by country, national government influence, and cultural differences.

In broadband networks, the efficient scale moat source is more prevalent, but in many cases is still not enough to generate consistent excess returns on invested capital. Deploying underground channels for fixed-line cables is costly and complicated, as new lines may affect entire neighborhoods, traffic flows, or coincide with other underground infrastructure like water pipes. Still, many countries have built several broadband networks on top of each other—normally, a nationwide copper/fiber network, a cable network, and additional regional networks. In the UK, for instance, network duplication has reached a high level, with some urban areas covered by three or even four different broadband networks.

The European regulatory environment is complex, with too many layers, and it is not supportive of moat creation. The European Commission is a major drag on consolidation and cost synergies, having blocked most merger and acquisition deals or imposed harsh remedies on firms. Even when a player is allowed to consolidate, the commission might force it to sell assets to a new entrant, wrecking the purpose of the merger. National regulators might have different views on key matters, and are often more concerned about consumers than shareholders, and periodically review their markets to look for signs of excessive concentration. Some of these reviews have led to governments forcing the entrance of new players on advantageous terms like Iliad in France in 2011, MasMovil in Spain in 2019, and Digi in Belgium in 2024. Once telecom prices rebase to a lower level, they rarely recover.

Vodafone’s largest market is Germany, where it is the second-largest player in both the mobile and fixed-line segments after Deutsche Telekom. The German mobile market has been a stable one for more than a decade. In 2019, 1&1 Drillisch acquired spectrum in the 3.5-gigahertz band and aims to transition from a mobile virtual network operator to a mobile network operator, but so far, 1&1 has shown rational behavior, which is important to maintain acceptable returns on invested capital. Still, 1&1’s network rollout will increase costs for the company, so we expect it will try to win some market share, something that could bring some price pressure to the German mobile market. Vodafone owns an extensive cable network due to the acquisitions of Kabel Deutschland in 2013 and Liberty Global Germany in 2019. The acquisitions were highly complementary as Kabel and Liberty covered different areas of the country. Still, we see Vodafone's cable network as inferior to that of Deutsche Telekom, which has executed an exceptional broadband strategy during the last decade. The German regulatory environment is generally good, as government and competition authorities have allowed operators to improve networks at their own pace.

In the UK, Vodafone completed a merger with CK Hutchison in 2025, effectively consolidating the market from four to three operators. We look favorably upon this move and believe the merger will create value as both firms can realize cost synergies while prices remain stable or grow slightly. Unlike BT Group and Virgin Media O2, Vodafone lacks its own fixed network; it relies on renting network capacity from other network providers to resell broadband services, a low-margin activity.

Across the rest of Europe (Portugal, Greece, Ireland, Czech Republic, Hungary, and Romania), Vodafone enjoys good competitive positions. In most of these countries, Vodafone enjoys a number-one or number-two position by share in the mobile market and additionally owns some cable networks after the acquisition of Liberty Global’s assets (Czech Republic, Hungary, Romania) in 2019, with good broadband penetration rates (above 40%).

Vodafone derives more than 20% of revenue from its operations in South Africa, Egypt, Turkey, and other African and Middle Eastern countries, where it is a mobile operator (very little fixed-line revenue with no proprietary fixed-line networks). The main advantage of some emerging markets tends to be limited competition, with sometimes only two or three mobile network operators per country. However, Vodafone’s emerging markets are more saturated, sometimes having four or five operators. The main advantage of these markets is that users are normally charged for incremental usage, with large data plans being less common. Vodafone owns 50% of Vantage Towers, its tower division, through a joint venture. Wireless tower businesses generally have more attractive unit economics than telecom businesses.

An ambitious cost plan is, in our view, the key catalyst for shares to rerate higher, but so far, progress on the cost front is rather disappointing.

A credible two-year to three-year strategic plan that would target consistent mid-single-digit organic growth in EBITDAaL through cost discipline and low-single-digit revenue growth would rerate the stock.

Exposure to growing markets in Africa and the Middle East should help top-line growth.

Regulation remains very tough for European telecoms, preventing effective consolidation and constantly encouraging the entrance of new players that drop prices.

Vodafone keeps losing market share to Deutsche Telekom in Germany due to a weaker network position and poorer execution.

Vodafone can do much more on cost savings. Despite management claims cost reductions, the total number of employees has not declined and selling and administrative expenses have grown.