Is Telecom Italia Stock A Buy?

Telecom Italia SpA (BIT:TIT) is Italy’s largest telecommunications company. It offers telephony, mobile, and DSL services, making it akin to Verizon (VZ) and AT&T (T) in the United States.

The company was hit hard by Q1 ’20 shutdowns, as the country was one of the early coronavirus hotspots. Some analysts believe this could signal a value, so is Telecom Italia stock a Buy?

Although telecom services seemed like a safe bet during the pandemic, the company’s CEO, Luigi Gubitosi, explained to Reuters its revenues took a major hit. This was caused by shops no longer selling phones to customers who were quarantined. Spending on mobile and landline phone payments took a backseat to more essential supplies and utilities.

Will Telecom Italia bounce back?

Telecom Italia 101

Initially founded in 1924, Telecom Italia went through a variety of changes over the years. The Italian State also holds what’s known as the “Golden Power” over the company, which allows it to force actions on the company for the country’s strategic interests.

Besides its italian operations, it also has a presence in Brazil, which has expanded its global reach. One of the company’s largest shareholders is Vivendi, which owns a 24.6 percent stake and installed Vivendi CEO Arnaud de Puyfontaine as Executive Chairman.

While it holds the bulk of Italy’s communications, it’s not alone. French telecoms firm Iliad is entering the market in 2021, and others, like Vodafone, already have a foothold with Italian consumers. This has some analysts wondering if the telecoms industry is facing a broadband pricing wars as the old virtual monopoly is challenged.

Telecom Italia leadership isn’t worried, but perhaps its investors should be.

Is Telecom Italia Stock A Buy?

Although a major utility provider in Italy, Telecom Italia SpA is a penny stock in the U.S. that must be bought on OTC markets. This is because despite a market capitalization over $9 billion, the company’s stock price is holding steady under $0.50 per share.

It’s half what the company traded for in March 2018, and the price still hasn’t recovered from when markets nosedived earlier in the year.

This makes the company a possible value Buy for bullish investors who believe the economy will return to normal in the near future.

Still, it’s a tall order to get overly optimistic. After all, the company’s revenue fell by 23.2 percent from the same period in 2019. It went from $5.6 billion in revenue for the fourth quarter of 2019 to $4.4 billion and $4.3 billion in the first and second quarters of 2020, respectively.

Buying Telecom Italia now is a bet that the company’s $5 billion fiber plan and 5G upgrade will be enough to maintain its dominance over the Italian markets even after new players enter the market. Stiff competition from new entrants remains the biggest threat to the company’s bottom line.

Risks of Buying Telecom Italia Stock

Despite being a long-standing company and public utility, Telecom Italia entered 2020 with a lot of debt. Its 27 billion Euro debt keeps its Moody and other analyst ratings down.

The race to 5G could also create problems, as it spends to upgrade its infrastructure. The problem with 5G is upgrading speeds without increasing customer bills to the point that they migrate to a competitor.

This ignores the biggest elephant in the room too – if the global pandemic is responsible for the company’s poor showing in 2020, it’s not likely to let up anytime soon.

Even with Pfizer’s announcement of positive vaccine results, another wave of the viral outbreak is washing over the earth along with flu season in the northern hemisphere.

This means the company could find itself struggling for a long time, something that may not be entirely linked to the pandemic, as executive leadership suggests.

And competition is getting fierce, as the company competes with the likes of Telekom, Orange, Deutsche, Telefonica, SingTel, AT&T (T), and Verizon (VZ). Each telecom company has plenty of money and resources to expand in the Italian market and put the long-standing utility on its back.

Can Telecom Italia Competitors Win?

Investing in Telecom Italia has historically been a fool’s gambit. This is because of the company’s massive debt and the investment needed for its 5G infrastructure upgrade.

It allows other companies to prove they deserve a chance, which the company isn’t keen on allowing. To stop this inevitability, it created a new company called FiberCorp to handle its fiber optic assets.

FiberCorp will then be merged with Open Fiber, creating a regulated national broadband monopoly in the country. This attracted a huge investment from KKR & Co, a U.S.-based buyout firm. Not only will this investment help it upgrade infrastructure, but it’ll effectively keep other players from participating in the market.

Of course, there’s plenty of risk in this move that could dilute the company’s stock prices. That could lead to a possible dip in the market price that some analysts believe could last through 2025. It’s also unclear how much ownership the government-controlled company will retain post-merger.

Is Telecom Italia Stock A Buy? The Bottom Line

Telecom Italia is Italy’s oldest (and, for the most part, only) telecom provider for landline telephony, mobile, and data uses. This gives it a unique working relationship with the Italian government and helps keep competitors sidelined.

The race to 5G is on though, and the company’s infrastructure is lagging. It’s taking some creative financial assistance to get back on track, however.

Thanks to some innovative strategic movements, the company has the money to finish its upgrades. But it’s unclear if it can generate a profit while digging itself out of debt and continuing to service customers.

The future is wide open for Telecom Italia as a company and investment.

 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.