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The artificial intelligence (AI) revolution seems to have passed the Vodafone Group (LSE: VOD) share price by.
In the US, AI-related stocks like Nvidia and Alphabet are soaring. But Vodafone shares have fallen more than 50% in the past five years. I think that could change, and it’s all to do with Alphabet, the Google holding company.
Billion dollar+
On Wednesday (8 October), Vodafone announced a 10-year extension to its strategic partnership with Google.
As part of the new deal, said to be worth more than $1bn, “Vodafone will expand access to Google’s AI-powered Pixel devices with its fast 5G network in Europe, and continue promoting the Android ecosystem“.
It should boost Vodafone TV, with access to Google Cloud’s gen AI. And it means Vodafone should be able to offer Google One AI Premium subscription plans in some areas by 2025.
CEO Margherita Della Valle said: “Vodafone and Google will put new AI-powered content and devices into the hands of millions… more consumers.”
Picks and shovels
The AI focus these days seems to be mostly on those companies at the sharp end. It’s the ones developing the actual AI software, and those providing the chips and other hardware it runs on. That includes things like Tesla‘s cars.
But the growth of AI is going to place heavy demands on two key commodities, energy and bandwidth. Energy is already big on people’s minds, especially with our bills climbing and oil prices booming.
But do we really have a full grasp of the communications capacity that AI technology could soak up in the coming decades?
Rival BT Group says it’s already passed peak capital expenditure for its fibre broadband rollout. So the cash flow situation there could well be at a pivotal point.
And the BT share price already seems to be gathering a bit of strength. Vodafone is still down though.
When will it turn?
My main concern, I think, is that Vodafone, in its own transformation, doesn’t look like it’s yet reached the “inflection point” that BT spoke of.
While BT’s dividend looks more reliable than it has been in some years, Vodafone’s is set to be slashed by half in 2025. That would leave both yields similar, at around the 5.5% mark.
But the fact that Vodafone let things go to such a point that a move like that was needed didn’t do a lot for confidence.
Della Valle’s shake-up is, in my view, exactly what Vodafone needed. But there’s plenty more to do.
Tight on cash
In the 2023-24 full year, Vodafone’s adjusted free cash flow dropped by 37%, to €2.6bn. And net debt reached €33.2bn. The company’s net debt to EBITDAaL (a non-standard EBITDA measure) is worse than BT’s, at around three times.
Part of me thinks Vodafone could indeed be set for a pivot point some time in the next few years. And positive movements in cash flow, net debt, and return on capital, could make it look good.
But another side of me thinks BT could be the better comms stock to consider right now, even with its own debt-related risks.
