Vodafone’s (LSE: VOD) 8% share price jump on the back of its 11 November H1 2025/26 results looked well-founded to me. And it is still around levels not seen since May 2023.
That said, I believe there remains a major gap between the stock’s price and its value. And in my experience, all asset prices tend to converge to their ‘fair value’ over the long term.
So, how much exactly is this gap?
What’s the stock’s true worth?
There can often be a big difference between a company’s share price and the value of that stock.
This is because price is simply whatever people are willing to pay for a stock. But value reflects the true worth of the underlying business’s fundamentals.
The discounted cash flow method uses cash flow projections for the underlying business to ascertain where any stock should trade.
Additionally positive for me is that it does so on a standalone basis. This means that it does not reflect any over- or undervaluations in the business sector in which it operates. This can happen with comparative valuation measure, such as price-to-earnings and the like.
In Vodafone’s case, the DCF shows its shares are a massive 66% undervalued at their current 94p.
Therefore, their fair value is £2.76.
What’s the market waiting for?
The current price-to-valuation gap has opened up due to market caution, I think. Vodafone is in the middle of a major transformation, and there are risks involved. This change comes from its merger with Three, with the new ‘VodafoneThree’ entity starting on 1 June.
The foundation stone of this new venture will be £11bn invested over 10 years to create Europe’s most advanced 5G network. £1.3bn will be invested in the first year to this end.
The aim is to secure the market leadership position in the UK over EE and O2.
The risk here is that this merger will fail in one respect or another. This could be financially costly in the short-term and could damage its reputation long term as well.
However, the analysts’ consensus forecast is that Vodafone’s earnings (or ‘profits’) will jump a colossal 62% a year to end 2027/28.
And it is precisely this growth that drives any firm’s share price (and dividends) higher over time.
How the recent numbers look
The H1 results released on 11 November looked solid enough to me for a company undergoing such a transition.
Revenue increased 7.3% year on year to €19.609bn (£17.29bn). This was driven by strong service revenue growth and the consolidation of Three UK.
Adjusted earnings before interest, taxes, depreciation, amortisation, and leases (EBITDAaL) rose 5.9% to €5.728bn.
On the back of these figures, the firm now expects to deliver the upper end of its guidance ranges. More specifically, these are for adjusted EBITDAaL of €11.3bn-€11.6bn and adjusted free cash flow of €2.4bn-€2.6bn.
My investment view
The only reason I am not buying Vodafone shares is that I already own BT stock. Buying another telecoms firm would unbalance the risk-reward profile of my portfolio.
So, I am looking at other deeply discounted, high growth stocks.
But for investors without my portfolio issue, I think Vodafone is well worth considering.
