Goldman Sachs Reiterates Sell Rating on Vodafone, Concerns Persist Over Weak German Growth

Overview

Goldman Sachs released an earnings commentary report on Vodafone's 4Q26 results. The report indicates that the company's performance and FY27 guidance are broadly in line with market consensus. While strong performance in non-European regions (such as Vodacom and Turkey) supported free cash flow (FCF) generation, growth in core European markets, especially Germany, remains disappointing. Given that underlying growth in the German market is unlikely to turn around in FY27, and the company confirmed a suspension of share buybacks in FY27 due to the 3 UK merger, Goldman Sachs believes this will limit near-term upside potential for the stock, thus maintaining a "Sell" rating with a target price of 85 pence.

Core views

Regarding performance and guidance, Vodafone Group's FY27 adjusted EBITDAaL guidance is EUR 11.9-12.2 billion, broadly in line with the market consensus of EUR 12.05 billion; adjusted free cash flow guidance is EUR 2.6-2.9 billion, approximately 4% higher than the consensus of EUR 2.666 billion, primarily due to limited changes in cash items other than capital expenditure. However, growth in hard currency free cash flow is offset by foreign exchange headwinds, leading the company to guide for only "growth" rather than "double-digit growth" for medium-term hard currency FCF. Regional performance shows significant divergence. EBITDAaL growth in the European market was disappointing, 0.9% below consensus in 2H26, with FY27 guidance of EUR 7.6-7.9 billion trailing consensus by 2%. Specifically, in the German market, although underlying organic service revenue growth (OSRG) narrowed to -1.5% in 4Q26 (excluding the tailwind from 1&1 wholesale) due to improved consumer broadband pricing and favorable B2B trends, fierce competition in mobile services means the company does not expect an underlying growth turnaround within this year. In the UK market, OSRG declined by 0.2% due to the pacing of B2B projects, but EBITDAaL grew 4.5% year-over-year thanks to strong delivery of cost synergies from the 3 UK merger. In contrast, growth momentum in the Vodacom and Turkey markets was strong, exceeding expectations. Regarding valuation and stance, based on the EV/IC and ROIC/WACC methodology, Goldman Sachs maintains a "Sell" rating on Vodafone with a 12-month target price of 85 pence (USD 11.58 for ADR). The firm believes that continued weak growth in Europe, especially Germany, coupled with the lack of a share buyback plan in FY27, will suppress the stock's potential for near-term outperformance.

Analysis framework

Goldman Sachs' analytical approach follows typical telecom operator sum-of-the-parts valuation and fundamental breakdown logic. First, by comparing actual performance with market consensus (Visible Alpha Consensus), it quantifies revenue and profit deviations across regions (Europe, UK, Germany, Others). Second, it deeply deconstructs structural issues in the German market, distinguishing between one-off factors (such as the 1&1 wholesale tailwind) and sustained competitive pressures (mobile services) to assess the likelihood of a growth recovery. Finally, combining capital allocation plans (such as the buyback suspension due to the 3 UK merger) and foreign exchange impacts, it evaluates the quality of free cash flow and its actual contribution to shareholder returns, thereby determining the rating and target price.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  EV/IC to ROIC/WACC methodology

  Goldman Sachs employs a valuation method combining Enterprise Value to Invested Capital ratio (EV/IC) with the spread between Return on Invested Capital and Weighted Average Cost of Capital (ROIC/WACC). This approach is commonly used in capital-intensive industries to measure whether the value created by a company exceeds its cost of capital, thereby assessing valuation reasonableness.

• Industry/Sector Analysis FrameworkVolume-Price Split

  Organic Service Revenue Growth (OSRG) analysis

  The research report focuses on analyzing Organic Service Revenue Growth (OSRG), breaking it down into the effects of changes in user numbers (volume) and changes in average revenue per user (price), while excluding non-organic factors such as foreign exchange and M&A, to truly reflect operational business trends.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Vodafone (VOD.L)

  Coverage subject, bearish due to weak European growth and lack of buyback plans

  Strengths

  Strong growth in non-European businesses (Vodacom, Turkey); good delivery of 3 UK cost synergies; decent free cash flow generation capability

  Weaknesses

  Underlying growth in the German market difficult to recover; overall European EBITDA growth below expectations; no share buybacks in FY27

  Risks

  Intensified competition in the German market; foreign exchange headwinds impacting hard currency cash flow

Key data

• FY27 Adjusted EBITDAaL GuidanceEUR 11.9-12.2 billionBroadly in line with market consensus of EUR 12.05 billion
• FY27 Adjusted Free Cash Flow GuidanceEUR 2.6-2.9 billionApproximately 4% higher than consensus of EUR 2.666 billion
• Germany 4Q26 Underlying OSRG-1.5%Excluding 1&1 wholesale tailwind, an improvement from -2.5% in 1H26
• UK 4Q26 OSRG-0.2%Impacted by the pacing of B2B projects
• UK 4Q26 EBITDAaL Growth+4.5%Benefited from 3 UK cost synergies
• Target Price85 penceSell rating maintained

Impact & implications

The report suggests that while strong performance in non-European businesses provides cash flow support for the company, sluggish growth in Europe (particularly Germany), as the core market, is the primary negative drag. The expectation that underlying growth in the German market will not recover in FY27, along with the cancellation of the FY27 share buyback plan due to the 3 UK merger, undermines investor confidence in short-term stock performance. This implies that, in the current environment, Vodafone's stock lacks obvious upside catalysts.

Risks

• Cessation of 1&1 network rollout (independent of integration)
• Vodafone's participation in German market consolidation
• UK market recovery benefits better than expected
• Execution stronger than expected
• Competitive environment in key markets better than expected
• Upside risks in emerging markets

What to watch

• Whether underlying growth in the German market turns around in FY27
• Long-term execution of cost synergies following the 3 UK merger
• Whether hard currency free cash flow growth can offset foreign exchange headwinds