The stock was already rated a “buy” by the US investment bank but following two recent updates that were more bullish for the top-line structural growth outlook than Goldman Sachs (GS) had anticipated the bank has added it to what is the equivalent of a racing tipster’s “nap” tip.
The first update from Vodafone that impressed GS contained news that business-to-business revenues grew by 2% in 2020 once coronavirus related issues are stripped out, whereas its peers reported declines of around 2%.
That’s a four-point percentage swing for a part of Vodafone’s business that accounts for 30% of its revenues.
GS’s view is that Vodafone benefits from its position as a challenger to incumbents in the fixed-line market and as a preferred partner in cloud/Internet of Things (IoT) initiatives.
The second bit of surprisingly good news came from Germany, where Vodafone’s reliance on the market has increased following the acquisition of cable companies.
German revenues (excluding roaming payments) grew by 2.5% year-on-year on a like-for-like basis in the third quarter of fiscal 2021 (i.e. Jan-Mar 2021) and GS expects this sort of growth to continue, “thanks to market growth and VOD’s under-penetrated cable network”.
“We have a differentiated view that VOD has a superior structural revenue growth outlook vs peers. Most investors we speak to are sceptical of this view, citing lack of evidence of superior top-line growth in the past. This further manifests in consensus top-line growth forecasts for limited growth and in the discounted multiple that Vodafone trades on,” GS said.
“We forecast European service revenue trends improving to sustainably higher growth from FY22 [fiscal 2022], following COVID headwinds in FY21, vs previous years and peers. The key reason we believe VOD will offer a superior growth rate in the future vs peers and compared to its past is its increased scale and quality of exposure to Germany,” it added.
GS’s 12-month price target for Vodafone is 195p. The shares currently trade at 140.66p, down 1.2% on the day.