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Why I think the Vodafone share price could keep climbing

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The Vodafone (LSE: VOD) share price has jumped 20% over the past 12 months. This figure is a bit misleading as this time last year, global financial markets were in full panic mode as the coronavirus pandemic swept the globe. Going back to the beginning of April 2019, the stock is down around 5%, excluding dividends. 

While past performance should never be used as a guide to future potential, looking at these figures, I think the stock could keep climbing from current levels. 

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Vodafone share price outlook 

Vodafone is one of the world’s leading telecoms companies. It has been a lifeline for many users throughout the pandemic, providing vital voice and data connections. With its large footprint across Europe, Africa and Asia, consumers all over the world recognise Vodafone. 

It would also be tough to copy what Vodafone does. Replicating the company’s telecoms network would be hugely expensive and technologically challenging. These qualities give the corporation a competitive advantage. Customers know what they’re getting from the business, and its global network allows the firm to offer its customers an international service.

What’s more, these customers tend to sign up on multi-year contracts, which guarantee a set level of revenues for the firm over a defined period. 

These are all desirable qualities, and there are few businesses listed on the London market that have similar competitive advantages to Vodafone. 

It’s for these reasons I believe the share price could continue to move higher. The firm has a host of competitive advantages that should continue to attract customers and guaranteed revenue streams from fixed contracts. 

Despite these qualities, the stock is changing hands at a price-to-free-cashflow ratio today of 4.6. I think that’s far too cheap. The rest of the telecoms sector is trading at a median ratio of 7.1. As well as this discounted valuation, the stock also supports a dividend yield of 5.8%. 

Risks and challenges 

Of course, just because a stock looks cheap doesn’t mean it will generate high returns as we advance. There’s also no guarantee Vodafone’s dividend is secure for the long term. A sudden drop in income could force management to slash the payout.

The company also has to spend billions every year maintaining an up-to-date network. If additional spending is needed, Vodafone may face a cash crunch.

The company may face a Catch 22 situation here. If it doesn’t spend, the group may lose customers to peers. On the other hand, spending may force the business to limit shareholder returns. So far, the organisation has been able to balance spending with returns. That may not continue. 

All of these challenges and headwinds could hold back the Vodafone share price in the medium to long term. 

Despite these challenges, considering the stock’s valuation, competitive advantages and long-term growth potential, I’d buy the business for my portfolio today. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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