Here’s why I think the Vodafone share price is undervalued

The Vodafone share price has been falling, but the company’s profits and customer numbers are still rising, which could be a buying opportunity.

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Over the past 12 months, the Vodafone (LSE: VOD) share price has returned -9%, excluding dividends. Over the same time frame, the FTSE All-Share has returned +13%.

This would make sense if the company had struggled to remain profitable throughout the coronavirus pandemic. But that’s not the case. Vodafone has performed better than many of the index’s other constituents.

Therefore, I think this presents an excellent opportunity for value-seeking investors.

Vodafone share price of opportunity

Whenever I look at a company that’s underperformed the broader market, the first thing I try to do is understand why. More often than not, it’s pretty clear why.

For example, shares in airline group IAG have lost -12% over the past 12 months because the company’s entire business model has been upended, and revenues have plunged.

However, when it comes to Vodafone, there’s no clear-cut reason why the stock has underperformed over the past 12 months. Instead of there being one reason why the stock has performed in the way it has, I think a group of factors are weighing on investor sentiment.

Chief among these is the fact that the mobile operator reported a fall in total group annual revenues of 2.6% to €43.8bn for its latest financial year. While Vodafone swung back into the black last year, reporting profits of €536m compared with a loss of €455m in 2019, this wasn’t enough for investors. The company reported a drop in roaming revenue for the overall decline in sales.

When these results were announced, the Vodafone share price plunged. It fell nearly 10% on the day.

But looking past the headline numbers, the group’s underlying performance is encouraging. Specifically, in Vodafone’s largest market, Germany, which accounts for 31% of total group revenues, sales increased 7.5%. Meanwhile, the organisation’s European mobile customer base grew by 2% to 65.4m.

And the company is planning to accelerate its capital spending plans in an attempt to grab more customers.

Investing for the future 

The company’s annual capital spending will rise from €7.85bn to €8bn as it invests more in 5G and broadband infrastructure. This increased expenditure seems to be another reason why investors have been selling the stock recently. I think that’s a mistake. Vodafone can only prepare for the next decade by investing today. If it doesn’t, customers will leave the business and revenues will slide.

Indeed, over the past few decades, the company has spent billions of euros developing its digital networks around Europe. The group’s increasing customer numbers suggest this spending is paying off.

Still, past performance should never be used as a guide to future potential. Just because the company’s spending has paid off in the past, doesn’t mean it will in future. Vodafone could end up spending billions on new infrastructure only to be overtaken by a competitor. This would put the business in a difficult position as it already has a lot of debt.

Nevertheless, I think the Vodafone share price looks cheap. The company has more customers and is more profitable than it was this time last year, but the stock is nearly 10% lower.

With that being the case, I’d buy the telecoms giant for my portfolio right now as I’m excited about its potential as the world becomes even more connected.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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