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The artificial intelligence (ai) revolution appears to have surpassed the Vodafone Group (LSE:VOD) share price per.
In the US, ai-related stocks like NVIDIA and Alphabet are on the rise. But Vodafone shares have fallen more than 50% in the last five years. I think that could change, and it all has to do with Alphabetthe Google holding company.
Billion dollars+
On Wednesday (October 8), Vodafone announced a 10-year extension of its strategic partnership with Google.
As part of the new deal, which is said to be worth more than $1 billion, “Vodafone will expand access to Google's ai-powered Pixel devices with its fast 5G network in Europe and continue to drive the Android ecosystem“.
It should power Vodafone TV, with access to Google Cloud's ai generation. 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 in the hands of millions… more consumers.”
picks and shovels
The focus of ai these days seems to be mainly on those companies that are at the cutting edge. They are the ones who develop the actual ai software and the ones who provide the chips and other hardware it runs on. That includes things like teslaThe cars.
But the growth of ai will place great demands on two key commodities: energy and bandwidth. Energy is already high on people's minds, especially now that our bills are rising and oil prices are booming.
But do we really fully understand the communications capacity that ai technology could absorb in the coming decades?
Rival BT Group says it has already surpassed the maximum capital expenditure for fiber broadband deployment. Therefore, the cash flow situation could well be at a crucial point.
And the BT share price already appears to be gaining some strength. But Vodafone is still down.
When will it change?
I think my main concern is that Vodafone, in its own transformation, does not seem to have yet reached the “turning point”What BT talked about.
While BT's dividend looks more reliable than it has in some years, Vodafone's will be halved in 2025. That would leave both yields similar, at around 5.5%.
But the fact that Vodafone let things get to the point where such a move was necessary didn't do much for confidence.
The restructuring of Della Valle is, in my opinion, exactly what Vodafone needed. But there is much more to do.
Scarce cash
In the full year 2023-24, Vodafone's adjusted free cash flow fell 37% to €2.6 billion. And the net debt reached 33.2 billion euros. The company's net debt to EBITDAaL (a non-standard EBITDA measure) is worse than BT's, around three times.
Part of me thinks Vodafone might actually reach a tipping point at some point in the next few years. And positive moves in cash flow, net debt and return on equity could make it look good.
But another part of me thinks BT might be the best communications stock to consider right now, even with its own debt-related risks.
