The Contrary Investment Case: 3 Reasons Why Vodafone Group plc Could Collapse


In recent days I have looked at why I believe Vodafone (LSE: VOD) (NASDAQ: VOD.US) is poised to hit the high notes (the original article can be viewed here).

But, of course, the world of investing is never black and white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, weigh heavily on Vodafone’s investment profile.

Difficulties in Europe set to persist

Unfortunately, Vodafone continues to struggle to turn around its ailing fortunes on the continent, a region responsible for more than two-thirds of group service revenues. On an organic basis turnover in Europe clattered 9.6% lower during September-December, to £6.5bn, with the firm noting that “the environment in Europe remains challenging and we have continued to experience intense macroeconomic, regulatory and competitive pressures.”

Vodafone is hoping to resuscitate performance through its £7bn Project Spring organic investment scheme, designed to boost its 3G and 4G capabilities and give its ailing customer base a shot in the arm. Although these measures bode well for growth in the long-term, in the meantime enduring pressure on European customers’ wallets — not to mention the effect of intensifying competition — is likely to keep the top line under the cosh.

Foreign exchange batters revenues

Vodafone intends to plough vast amounts of capital into building its capabilities in emerging markets. And last month’s results revealed the stellar progress that such investment has in these geographies, with organic service turnover advancing 5.5% across these territories during September-December, to £3.2bn.

Still, Vodafone is suffering heavily from adverse currency movements in these developing regions, a scenario likely to worsen as inflation ravages these far-flung currencies. Indeed, the company said that adverse forex changes affected total revenues by a chunky 2.1% during the final three months of 2013, driven mostly by weakness in the Indian rupee, South African rand and Turkish lira.

Takeover hardly a done deal

Acquisition activity looks set to intensify across the global telecoms space, and Vodafone has long been attracting longing glances from potential suitors in North America and Asia. US giant AT&T has long been touted as the most likely bidder, and many believe that Vodafone’s sale of Verizon Wireless last month will lead to initial overtures from other interested parties.

Such frenzied speculation has driven Vodafone’s stock 15% higher in little over a fortnight. Of course the possibility of a deal is far from a formality, however, and although I believe Vodafone is a very attractive takeover target, the share price could be in danger of severe weakness should bidders fail to materialise in the near future.

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> Royston does not own shares in any of the companies mentioned in this article.