Image source: Vodafone Group plc
I Vodafone (LSE:VOD) share price has fallen over the past decade as the company has struggled to earn a decent return on large investments. But things seem to be going well.
With approval to merge its UK operations with Three and the sale of its Italian business completed, Vodafone looks to be in a strong position. So should investors consider buying the stock while it’s down?
Scale
Vodafone’s business is facing two major structural problems. The first is that it works in an industry where capital requirements for building and maintaining infrastructure are at a high level.
The company must find ways to get a return on its investment, but it faces an additional challenge in trying to do this. The problem is that customers are highly influenced by prices.
Combined with low switching costs, this means Vodafone cannot simply raise prices to customers to increase revenue. And this puts the business in a difficult situation.
If it cannot generate more revenue by raising prices, the only strategy is to lower its costs. And that’s what the company is trying to do with its latest restructuring moves.
Ins and outs
Vodafone recently completed the sale of its operations in Italy. In doing so, it has raised around £6.6bn in cash, which it plans to use for debt reduction and shareholder returns.
The amount returned to investors should be 7.5% of the current market rate. More importantly, the sale should remove the company’s need to invest in a market where it has been difficult to get a decent return.
In the UK, Vodafone’s bid to merge with Three has been approved by regulators. This should increase its customer base significantly, allowing it to achieve a better return on its existing infrastructure.
Both of these moves look good for the company in the long run. But there are a few things I think investors considering buying the stock should be aware of going forward.
Ongoing problems
Despite the recent progress, I think the market is still right to be complacent about Vodafone shares. There are still issues going on that make me skeptical of the stock as an opportunity.
Undoubtedly, the company’s biggest problem is in Germany. The increase in prices – unsurprisingly – leads to lower prices for customers and the revenue decreases in the region as a result.
About a third of Vodafone’s sales come from Germany, compared to less than 20% from the UK. So I doubt that the higher returns following the Three merger would offset lower sales elsewhere.
Finally, the company has committed to significant investment in the UK’s 5G network as part of its merger agreement with the Three. So it may be a while before investors see returns.
Time to shop?
Arguably, there has never been a better time to buy Vodafone shares in the last 10 years. But I am still not attracted to the stock from an investment point of view.
While there are encouraging signs – and I think these are real issues – there are still major challenges ahead. So I think there are better opportunities for investors to look elsewhere.
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