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Vodafone’s (LSE: VOD) share price tumbled following the 12 November release of its H1 2025 results. To me though, the market reaction looked overdone.
Indeed, around 18 months into a deep company reorganisation, the numbers appeared a lot more promising than I had anticipated.
The (bad?) H1 results
The telecoms giant’s revenue rose 1.6% to €18.3bn (£15.3bn) year on year. Its operating earnings shot up 28.3% to €2.4bn. And its adjusted core earnings increased 3.8% to €5.4bn.
The geographical refocusing of its reorganisation has progressed. Spanish and Italian asset sale deals accompanied the provisional regulatory approval of its merger with UK mobile competitor Three. The final decision on the deal from the competition regulator will be made on 7 December.
And Vodafone also reiterated its full-year 2025 guidance of core earnings of around €11bn and adjusted free cash flow of at least €2.4bn.
What prompted the negative market reaction was Q2’s 6.2% fall in service revenues in Germany – its biggest market. However, this was largely due to a change in German TV law beyond Vodafone’s control.
One key risk in the stock for me is the intense competition in the telecoms sector that could squeeze Vodafone’s profit margins. Another is a veto by the regulator of its proposed merger with Three.
Are the shares undervalued?
To determine whether any stock is undervalued, I begin by looking at its price-to-earnings ratio (P/E) compared to its competitors.
Vodafone is at the bottom of this group, with a P/E of just 9.2 against a competitor average of 19.1. So, it is very undervalued on this basis.
The same is true regarding the price-to-book ratio, on which it trades at 0.4 against a 1.7 peer average. And it also looks very cheap on the price-to-sales ratio at 0.6 compared to a competitor average of 1.2.
To find out what this means in share price terms, I ran a discounted cash flow analysis. This shows Vodafone shares are 55% undervalued at the present price of 70p.
So a fair value for the stock is £1.56, although it may never reach that figure. It may go lower or higher.
Will I buy the stock now?
I think CEO Margherita Della Valle’s turnaround plan may well succeed over time. However, I am in the latter part of my investment cycle, aged over 50 now.
This has seen me sell nearly all my out-and-out growth stocks and focus on shares yielding 7%+. The idea is that I live off the dividends while reducing my workload.
I understand the merits for Vodafone of halving its dividend next year from the previous 9 euro cents as it has. However, the roughly 5% yield it will offer does not meet my minimum requirement.
Additionally, I have rarely bought shares priced under £1 at any point in my investment cycle. And the ones I did, I regretted. The reason is that each penny represents a relatively high percentage of the share’s overall value. This adds higher pricing volatility risk to the other risks associated with any stock.
However, if I was just starting out investing and less averse to taking such a risk, I would see Vodafone as a possible buy.
