Vodafone Group PLC (LSE:VOD) second quarter brought signs of operational improvement, but UBS argues the market has taken the good news too far.
The shares have rallied more than 35% this year, helped by buybacks and a cleaner portfolio after the sale of Spain and Italy, yet the bank keeps its 'sell' rating and 80p price target.
Its core view is that the stock now trades at a premium to peers on reported free-cash-flow yield, even as three material risks remain underappreciated.
The first is rising fibre competition in Germany’s multi-dwelling units, a segment that has traditionally underpinned Vodafone’s cable economics.
The second is potential downside at Vantage Towers, particularly if Spanish tenancy revenues weaken further. The third is the possibility that Vodafone loses its lucrative 1&1 national roaming agreement if German mobile consolidation gathers pace.
Each of these, UBS says, could chip away at the bullish narrative investors have built around the turnaround.
The numbers in Germany illustrate the dilemma. Service revenue growth turned positive in Q2 for the first time in five quarters, but the improvement was largely driven by the accelerated onboarding of 1&1, which UBS estimates added about €90 million in the quarter.
Underlying service revenues are still declining by more than 2%, squeezed by competitive mobile pricing, broadband losses and pressure on TV. The bank expects Q3 to show a stronger contribution from 1&1, but warns that the boost will fade as the comparison base toughens.
EBITDAaL is also improving but remains in decline even after a €350–400 million annualised uplift from 1&1.
Meanwhile, UBS argues the market has yet to fully factor in wholesale costs from the OXG fibre joint venture or the risk that regulatory changes push Vodafone to accelerate capex or pay for access to Deutsche Telekom’s network.
The upshot is that the guidance tweaks and bond buyback gains do not offset the structural challenges. For all the progress on simplification and cash returns, UBS sees a mismatch between Vodafone’s premium valuation and the risks still embedded in its core markets.