Vodafone Down 20% MOM, Any Respite?

Vodafone's share price was already headed downward through most of May but accelerated lower after earnings disappointed it now marked a 20% monthly drop. Where could it stop?

Traders Dissatisfied About Merger, Earnings

The company's new CEO, Margherita Della Valle, has her work cut out for her: The stock price started its recent decline just a few days after her appointment, but YTD is faring much better at only -7% down compared to the 20% MOM. Traders were unhappy about the expanding merger with CK Hutchison, this time for the mobile UK market, which precipitated the drop in share price that was compounded later with the release of the annual report.

Concurrent with the earnings report in mid-May, the company announced it would cut 11,000 jobs over the next three years. The cost-cutting announcement didn't impress, with the CEO remaining non-committal about what would happen with the dividend, intending to reinvest the savings. The company's largest division - Germany - would not see the lion's share of the cuts, despite lacklustre growth in subscribers. The company's poor handling of the legislative changes in Germany has put it well behind its rivals in the country and might need radical changes to catch up.

Further Slowdown in Future Prospects

The company sees higher inflation and energy costs affecting the bottom line for the coming fiscal year, particularly in Germany. The guidance admitting to a further slowdown in the coming year despite saying EBITDA would remain stable was likely a catalyst for investors to worry. The company has a track record of buy-ins that have benefitted rivals, such as the expanded merger with Hutchison and the increased investment from Emirates Telecommunications.

While the CEO provided a "new roadmap" for the year, the main takeaway seems to be that there are no easy solutions, and even management sees the company struggling for the rest of the year. With free cash flow substantially lower than in prior years, it might be hard to convince the Board to increase the dividend, one of the few ways the company has left to attract investor interest in the short term.

Triangle Provides Insight Into Potential Bottom

While the share price of Vodafone trades at multidecade lows, further downside may be limited when compared to the measured move of the multiyear triangle pattern near 60 GBX. The thesis is unlikely to change so long price remains under the short-term resistance at 83 GBX or the medium-term one at 93 GBX. Only a break past the latter could see improved chances at 106 GBX and beyond. Conversely, traders can focus on round support levels on the way down, with 70 GBX and 65 GBX above the measured-move projection.

Key Takeaways

Vodafone's share price has seen a 20% monthly drop due to disappointing earnings and dissatisfaction with the expanding merger with CK Hutchison. Margherita Della Valle, the new CEO, faces a challenging task, as the announced cost-cutting measures didn't impress investors, and she remained non-committal about what would happen with dividends. The company's poor handling of legislative changes in Germany has left it far behind its rivals, adding to disappointing guidance despite EBITDA remaining stable. Management sees the company struggling for the rest of the year, and its low free cash flow might make it hard to convince the Board to increase dividends.