Is Vodafone Group plc Struggling To Keep Up With The Competition?

In an increasingly competitive multimedia market, Vodafone (LSE: VOD) is struggling to keep up with the competition as peers slash prices and diversify into new markets to improve growth. 

Since 2008, Vodafone has been pursuing a strategy of streamlining and bulking up. Specifically, the group has been trying to slim down its mobile business to free up resources for TV and internet services. 

A critical part of this strategy was Vodafone’s plan to swap assets with John Malone’s Liberty Global. Liberty Global is one of the world’s largest cable companies and by buying European assets, Vodafone would have been able to bolt-on millions of additional customers. Many analysts agree that any deal with Liberty would have transformed Vodafone. 

However, now that Vodafone and Liberty have parted ways, Vodafone is at risk of being left behind. According to City analysts, the company is losing market share to EE and O2 here in the UK, while across Europe, the company is struggling to gain traction in two of its biggest markets, Spain and Germany. 

While the TV and internet businesses have grown, mobile revenue is declining as rivals cut prices and users shift to lower-cost plans or abandon Vodafone altogether.

Still, Vodafone remains a leader in emerging markets such as India and South Africa, although the revenue per user generated in these regions is far below that generated across Europe.

Outlook bleak

The consensus in the City seems to be that Vodafone will struggle to produce any growth over the next two years. For the financial year ending 31/03/2017 analysts expect Vodafone to report earnings per share of 5.9p, down around 23% from the figure of 7.7p reported for the year ending 31/03/2014.

The above figures have led many in the City to brand Vodafone an “ex-growth” company in recent years, and unless the company makes a significant acquisition to boost its European presence, it’s likely this undesirable label will remain attached to the company.

But Vodafone could have already been priced out of the market. The company needs to do a big deal to get the kind of European exposure it needs to help offset stagnating mobile revenue and improve customer retention. Some have suggested that Sky could be a great fit for the company, but the company is expensive, and Vodafone has a history of overpaying for acquisitions.

Nevertheless, while Vodafone’s top line comes under pressure, it is believed that over the next 18 months the company’s bottom line will gradually improve. Project Spring spending should be largely complete by the end of next year, and this should help improve group cash flow. The cash situation is set to improve by £3.3bn in the next financial year, and that easily covers £3bn in annual dividend payments. Vodafone’s dividend yield currently stands at 5.1%.

Not for growth investors 

So, if you’re buying for income, Vodafone remains a great pick. However, as the company is struggling to grow in an increasingly competitive market, growth investors might want to look elsewhere.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.