Vodafone (LSE: VOD) is trading at nearly a three-year high, which might not look a cheap share to some.
But because price and value differ in a stock, where it is trading now is irrelevant. What matters is how much value remains in the shares.
I believe there is a lot more than markets think, given the company’s recent transformation.
So, how cheap is it?
Where’s the growth coming from?
Earnings growth drives any firm’s share price over time. One risk for Vodafone is that it operates in some of the most price‑sensitive telecoms markets in Europe. Increasing competition in them may pressure the firm’s margins and limit pricing power.
That said, consensus analysts’ forecasts expect Vodafone’s earnings to grow around 46% a year to end-2028. This reflects a business moving from defensive restructuring into a phase of targeted investment and operational simplification.
A major pillar of that outlook is Vodafone Three, the merger of Vodafone UK and Three UK. Management believes this will unlock the scale needed for its nationwide 5G rollout, reduce duplicated network costs, and create a more efficient capital base. I think so too.
The firm is backing this new venture with £11bn invested over 10 years, including £1.3bn this year. It aims to create Europe’s most advanced 5G network and secure market leadership in the UK over EE and O2.
Transition reflected in results?
Revenue increased 7.3% year on year to €19.609bn (£17.29bn) in H1 fiscal-year 2026. 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.
Given this momentum, Vodafone now expects to deliver at the top end of its 2026 guidance ranges. These include adjusted EBITDAaL of €11.3bn-€11.6bn and adjusted free cash flow of €2.4bn-€2.6bn.
In its earlier full-year 2025 results, service revenue grew 5.1% organically to €30.8bn. This highlighted to me that the firm could deliver growth even after years of stagnation.
Free cash flow was €2.5bn, beating guidance and demonstrating that the restructuring efforts were paying off. This alone can be a meaningful driver of future earnings growth.
How cheap do the shares look?
A discounted cash flow (DCF) analysis identifies where a stock should trade by projecting future cash flows and ‘discounting’ them back to today.
The more uncertain earnings forecasts are, the higher the return investors demand and the greater the discount applied.
Analysts’ DCF modelling varies — some more bullish than mine, others more cautious — depending on the variables used.
However, based on my DCF assumptions — including a 7.5% discount rate — Vodafone shares are 49% undervalued at their current £1.02 price.
On that basis, I calculate a ‘fair value’ of around £2.
This is crucial here, as stock prices tend to trade toward their fair value over time.
My investment view
I already hold BT shares, so buying another telecoms stock would unbalance the risk-reward profile of my portfolio.
However, with its major strategic reset, I expect Vodafone’s earnings to accelerate sharply over the next few years. And this should power its share price much higher, in my view.
Consequently, I believe the stock is well worth the consideration of other investors right now.
