AT&T vs. Vodafone: Which Telecom Stock is a Better Investment?

Dallas, Tex.-based AT&T Inc. (T) provides telecommunication, media, and technology services worldwide. The company operates through Communications; WarnerMedia; and Latin America segments. U.K.-based Vodafone Group Plc (VOD) also provides telecommunication services internationally. The company offers mobile services; fixed-line services, including broadband, television (TV) offerings, and voice; and convergence services.

The demand for telecommunication services and the need for upgrades have increased significantly over the past year with a shift to hybrid work structures and cloud-based solutions. Also, rapid digitization trends worldwide have increased the need for high-speed connectivity.

Telecommunication companies are investing in next-generation communication infrastructures and faster deployment of 5G connectivity to keep up with consumer preferences. Analysts expect the global telecom services market to reach $2.47 trillion by 2028, growing at a 5.4% CAGR. The growing telecom market bodes well for recognized industry leaders T and VOD.

But T's shares have slumped 14.7% in price over the past six months, while VOD has lost 19.6%. In terms of the past year’s performance, VOD is a winner with 7.7% gains versus T’s 4.8% slump. Also, VOD’s 7.1% decline year-to-date compares with T’s 11% fall.

But which stock is a better buy now? Let’s find out.

Latest Developments

On October 13, T announced that it would introduce a solution that can accelerate and streamline massive deployments of Internet of Things (IoT) devices and applications globally through cellular connectivity. Given IDC’s earlier estimates that the overall number of connected Internet of Things devices worldwide could reach 40 billion by 2025--indicating an increase from 31.1 billion in 2020--T could strengthen its position in the IoT space with its solutions amid the growing deployments.

In September, VOD and its partners tested a system that will make it quicker and easier to deliver faster-fixed broadband services to new and existing customers across Europe. This demonstrates the company’s efforts to integrate more significant technological innovation and form a more diverse supply chain.

Recent Financial Results

T’s total operating revenues increased 7.6% year-over-year to $44.05 billion in its fiscal second quarter, ended June 30. Its income before taxes stood at $2.63 billion, up 5.1% from the same period last year. Its net income attributable to T grew 22.6% from the year-ago value to $1.57 billion. And the company’s EPS increased 23.5% year-over-year to $0.21.

For its fiscal year 2021, VOD’s revenues declined 2.6% year-over-year to €43.81 billion ($50.96 billion). Its adjusted EBITDA decreased 3.3% from its year-ago value to €14.39 billion ($16.74 billion). However, its operating profit improved 24.3% from the same period last year to €5.10 billion ($5.93 billion). The company’s profit for the year came in at €536 million ($623.51 million), up substantially from its negative year-ago value.

Past and Expected Financial Performance

T’s revenues and EBITDA have grown at CAGRs of 3.6% and 2.7%, respectively, over the past three years. The company’s EPS is expected to grow 3.1% in the current year. Furthermore, its EPS is expected to grow 2.7% per annum over the next five years.

In comparison, VOD’s revenues and EBITDA grew at CAGRs of negative 2% and 7.5%, respectively, over the past three years. The company’s EPS is expected to grow 10.4% in its current fiscal year. Also, VOD’s EPS is expected to grow 72.2% per annum over the next five years.

Profitability

T is more profitable with a gross profit margin and EBITDA margin of 51.75% and 30%, respectively, compared to VOD’s 31.32% and 27.53%.

Furthermore, T’s 3.51% and 4.94% respective ROA and ROTA compare with VOD’s 1.58% and 1.86%.

Thus, T is more profitable here.

Valuation

In terms of forward EV/Sales, T is currently trading at 2.35x, which is 6.4% higher than VOD’s 2.20x. However, VOD’s 10.53 forward P/E ratio is slightly higher than T’s 10.45.

POWR Ratings

T has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, VOD has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

T has a B Growth grade, which is consistent with its stable rise in financials in the latest quarter. On the other hand, VOD has a C Growth grade, which is in sync with its mixed financials in its last reported quarter.

Both the stocks have a B grade for Stability, owing to their less than one betas.

Of the 21 stocks in the Telecom – Domestic industry, T is ranked #2. Alternatively, among the 48 stocks in the Telecom – Foreign industry, VOD is ranked #42.

Beyond what we’ve stated above, we have also rated both the stocks for Value, Momentum, Quality, and Sentiments. Click here to view T ratings. Also, get all VOD ratings here.

The Winner

Both T and VOD should benefit significantly from the growing telecom market, given their global presence. However, its higher profitability and a more robust financial profile we think make T the better choice here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Telecom – Domestic industry here. Also, click here to view the top-rated stocks in the Telecom – Foreign industry.

T shares were trading at $26.03 per share on Wednesday morning, up $0.44 (+1.72%). Year-to-date, T has declined -2.75%, versus a 22.16% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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