Now that the Verizon Wireless deal is in the rearview mirror and Vodafone (NASDAQ:VOD) has a solid balance sheet the large wireless provider is ready to shine. A lot of the issues inflicting Vodafone are related to the European wireless market still recovering from the hangover of the 3G auction at the peak of the tech bubble back in 2000. The industry overspent on spectrum and paid dearly for the next decade.
According to data from the wireless industry group GSMA reported by Bloomberg, the average wireless bill in Europe is nearly half that of the US. Europeans only spend $40 per month on wireless phone bills while the counterparts in the US spend about $70. Whether or not that gap is closed with the advancement of 4G services is a big part of the investment decision in Vodafone or wireless carriers in Europe in general.
A big factor in the significantly lower wireless bills in Europe is that consumers have been stuck on 3G service plans for a long time allowing for more pricing pressure and less differentiation on services and network speeds.
In just U.K. alone, the 3G auction raised $33.4 billion, compared to only roughly $3 billion for the 4G auction. The overspending on 3G auctions left the wireless carriers with strained balance sheets at the same time that new phones couldn't take advantage of the faster 3G networks. Fast forward, the issues with 3G have caused carriers to delay spending on 4G leaving Europe vastly behind the U.S. and parts of Asia. Back during 2013, the Wall Street Journal provided the following graph of the drastic 4G subscriber differences at the end of 2012:
The major benefit from cashing out of the Verizon Wireless investment is that Vodafone exited out of a market where 4G is nearly saturated to invest in the home markets that are only starting to ramp up. At the time of the deal, the company pledged to ramp up spending on 4G networks in Europe and 3G networks in emerging markets like India.
The plan originally involved spending an additional $9 billion on network investments. Some of the forecasted highlights are below:
- Accelerate 4G network build to cover 90% of five main European markets by 2017.
- Deeper 3G coverage and capacity in mature markets.
- Unified communications with extended fibre roll-out.
- Additional 3G voice and data coverage in emerging markets.
- Enhanced Enterprise service portfolio, including IP-VPN, Cloud, Hosting and M2M.
- Faster deployment of mobile payment services.
Eventually, the spending plans for Project Spring were increased and now the company uses a figure of around $28 billion to discuss the total planned capital spending for the two-year period. In total, capex nearly doubled YoY in the last quarter ending in June. The 4G footprint reached 52% of the European markets with 6.7 million customers on the faster network across Europe. Note that in the chart above that South Korea had nearly 30 million subscribers on 4G roughly 20 months ago.
Another example of how far Vodafone is behind the US market to building out 4G networks is Verizon launched its service in the US on December 5, 2010. As the slide below highlights, Vodafone didn't launch most key markets outside Germany until 2013.
Though Europe will drive the stock over the next couple of years, the potential in India and other emerging markets will play a big role in long-term success. In India, the 3G coverage footprint has now reached 89% of the targeted urban markets. A total of 2,305 sites were added during the last quarter. In South Africa, Vodafone added 473 4G sites along with some additional 3G sites to fill in the network.
Valuation Measures Don't Impress
The biggest area where investors aren't impressed with Vodafone are most general valuation metrics. The stock trades at generally the same multiples as the domestic giants of AT&T (NYSE:T) and Verizon (NYSE:VZ) such as the standard price to sales ratio.
Why pay up for a struggling European carrier? This is where investors need conviction that Vodafone consumers will eventually pay more for wireless services and close the gap with the US counterpart.
Of course, the key is to a valuation is what Vodafone and Europe do with the 4G networks. Are the wireless carriers able to start charging more for premium data speeds similar to in the US?
Typical of most investments, anybody can run figures on multiple valuation metrics or forecast future cash flow projections, but the ultimate value of a stock is based on execution of a business plan and market dynamics. In the case of wireless providers, the investment thesis to back is that Europe will rebound while domestic providers will struggle from the sudden price war initiated by Sprint (NYSE:S). The strong balance sheet and increased capital spending on 4G networks by Vodafone make it the top selection in the group.
Disclosure: The author is long VOD.
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