Despite growing economic worries, the FTSE 100 continues to trade near all-time highs, delivering double-digit returns over the last 12 months. But even with this strong performance, Vodafone (LSE:VOD) shares are proving to be a bit more impressive, delivering closer to 15% over the same period. And anyone who invested at the start of 2025 has since earned an even chunkier 25%!
Looking at the latest trading data from AJ Bell, Vodafone was the third most popular purchase over the past month, right behind Rolls-Royce and Nvidia. That’s quite a difference compared to the start of the year, where investors were actively selling their shares.
So what’s changed? And could this be the start of a potential comeback story?
Shifting investor sentiment
Vodafone’s in a bit of a complex situation. Management’s actively restructuring the business to focus on its core German, British and African markets while selling off its remaining European and international operations.
The proceeds from these disposals are already being used to chip away at its problematic debt pile. However, the stock’s recent momentum appears to revolve around its recently successful merger with Three UK. Providing the deal lives up to performance expectations, an extra €400m could be flowing to the bottom line each year alongside £700m of potential cost synergies.
Management certainly seems to be confident, given it has also launched a €500m share buyback programme. And with some operational improvements already materialising, the group’s underlying profit margins have started ticking back in the right direction, albeit very slowly.
Pairing these factors with a fairly undemanding valuation has led to speculation that the FTSE 100 stock was overly punished for its previous mistakes. Some institutional analysts have even gone on to raise their share price targets, anticipating that if Vodafone continues to hit operational milestones, the stock could have further to climb.
What could go wrong?
It’s always encouraging to see a struggling business get back on its feet. However, not everyone’s convinced that Vodafone is out of the woods just yet. Even if the Three merger delivers on its promises, there are several lingering issues that aren’t going to be easily solved.
Analysts at JP Morgan have explicitly raised concerns over the state of its operational execution in Germany. The shifting regulatory landscape surrounding telecommunications businesses has already resulted in new headwinds.
For example, a recent law change surrounding bundling TV into rent by landlords saw Vodafone lose an estimated three to four million TV customers. And that’s after spending aggressively on marketing campaigns to try and retain these clients, demonstrating the highly competitive environment Vodafone has to navigate.
Continued erosion of share within its largest market could ultimately offset any gains made in the UK and Africa. And with another €55.1bn of debts & equivalents still to address, weaker German performance could prevent management from delivering the turnaround that investors are hoping for.
The bottom line
There’s no denying that overall, Vodafone’s in a much stronger financial and operational position compared to a year ago. But there remains a long road ahead. And until I see better results coming from Europe, I’m staying on the sidelines.
Instead, I think investors may get better returns by exploring other potential FTSE 100 opportunities.
