Image source: Vodafone Group plc
He Vodafone (LSE:VOD) share price has fallen over the last decade as the company has struggled to make a decent return on large capital investments. But things seem to be going in the right direction.
With approval to merge its UK operations with Three and the sale of its Italian business completed, Vodafone appears to be in a stronger position. So, should investors consider buying the stock while it's down?
Scale
Vodafone's business faces two major structural problems. The first is that it operates in an industry where the capital requirements to build and maintain infrastructure are high.
The company has to find ways to earn a return on its investments, but it faces an additional challenge in trying to do so. The problem is that customers are mainly influenced by price.
Combined with low switching costs, this means Vodafone cannot simply increase prices to customers to increase its revenue. And this puts the business in a difficult position.
If you can't generate more cash by raising prices, the only strategy is to reduce your costs. And that's what the company is trying to do with some recent restructuring measures.
Ins and outs
Vodafone has recently completed the sale of its operations in Italy. In doing so, it raised around £6.6bn in cash, which it plans to use to reduce debt and generate returns for shareholders.
The cash returned to investors should total around 7.5% of the current market capitalization. More importantly, the sale should eliminate the company's need to invest in a market where it has struggled to earn a decent return.
In the UK, regulators have approved Vodafone's bid to merge with Three. This should significantly increase your customer base, allowing you to get better performance from your existing infrastructure.
Both measures seem positive for the company in the long term. But there are a few things that I think investors considering buying stocks should be careful about in the future.
Current problems
Despite recent developments, I think the market is still right to be unconvinced by Vodafone stock. There are still some outstanding issues that make me skeptical about the stock as an opportunity.
Arguably the company's biggest problem is in Germany. As expected, rising prices are leading to fewer customers and, as a result, revenues are declining in the region.
Around a third of Vodafone's sales come from Germany, compared to less than 20% from the UK. So I doubt that the higher returns following the Three merger can offset the lower sales elsewhere.
Finally, the company has committed to making significant capital investments in the UK's 5G network as part of its deal to merge with Three. Therefore, it could take some time before investors see the benefits.
Is it time to buy?
There has arguably never been a better time to buy Vodafone shares in the last 10 years. But I'm still not attracted to stocks from an investment perspective.
While there are encouraging signs – and I believe they are genuinely positive – there are still major challenges to be resolved. That's why I think there are better opportunities for investors to look elsewhere.
