On Oct 9, 2013 we maintained our Neutral recommendation on telecom giant Vodafone Group Plc. (VOD). Vodafone is enjoying significant market traction in emerging markets and is expected to generate higher returns given its lower infrastructural costs. Gradual shift toward more data centric services provides additional revenue opportunities for the company. However, deteriorating service revenues particularly in the European nations remain a major concern for Vodafone. The company currently carries a Zacks Rank #2 (Buy).
Strong adoption of data services and migration to smartphones continue to remain the growth drivers across most of Vodafone’s market. Expansion in emerging markets including Eastern Europe, India and Africa as well as growth in enterprise market and in machine-to-machine business also bode well.
Vodafone is way ahead of its competitors in 3G upgrade and intends to upgrade 3G networks to 43.2 Mbps by end of fiscal 2014. Furthermore, the company is accelerating its 4G expansion and targets to cover five European markets in fiscal 2014. This network upgrades and rollout will complement the significant growth in data services.
The company is also considering a strategic option to spread its business. It is in talks to acquire Kabel Deutschland and expects to complete the buyout by the end of 2013. In Sep 2013, Vodafone reached an agreement with Verizon to sell its 45% interest in Verizon Wireless for $130 billion and struck a wholesale agreement with Deutsche Telecom for offering high-speed fixed-line broadband and Internet protocol-based TV services across Germany.
Nevertheless, saturation in the European wireless markets, continues to affect the company’s performance and is likely to continue for the next couple of years given the high subscriber penetration rates. Weak economic conditions have forced consumers to switch to cheaper alternative services offered by competitors. This is affecting a premier service provider like Vodafone.
Further, Vodafone remains under pressure in its home turf post combination of the Deutsche Telekom and France Telecom U.K. units. Moreover, Vodafone has to face integration risks and unpredictable political, regulatory and legal issues owing to its acquisition spree. These risk factors compel us to remain sidelined on Vodafone.