The Vodafone (LSE:VOD) share price has had a pretty rough year. Despite the effects of the pandemic being largely irrelevant to today’s operations, the telecommunications giant continues to see its stock suffer. While it’s up by around 6% over the last 12 months, the Vodafone share price has fallen by almost 20% since May.
It seems many income investors are getting concerned about the firm’s mounting pile of debt as it deploys 5G infrastructure. Some analysts have even forecast that the dividend could be cut again or even cancelled in the future. But while dividends might be suffering, Vodafone’s growth projects in Africa are thriving. Let’s take a closer look at what’s going on, and whether the recent fall is actually a buying opportunity.
Is Vodafone secretly a fintech company?
Here in the UK and across Europe, Vodafone is best known as a telecommunications giant, battling with the likes of BT Group for market share. However, in Africa, it’s becoming a rising financial technology star. It offers a platform called M-Pesa, which allows individuals to complete digital payments from their mobile phones. And even before the pandemic came along, M-Pesa had become a new standard method of completing payments in countries like Egypt, Kenya, Mozambique, as well as a handful of others.
This month, Vodafone announced that M-Pesa has grown to serve more than 50 million monthly active users. In the last quarter alone, 4.5 billion transactions moved through Vodafone’s payment network, with a total value of €63bn. That’s around 300,000 additional users since the last time I looked at this business in August. This is undoubtedly positive news for the Vodafone share price.
The release of the M-Pesa Super App in June has likely been a significant contributor to this accelerated growth. And with plans to continue expanding into other African nations, I doubt this growth rate will be slowing down any time soon.
The risks for the Vodafone share price
As M-Pesa continues to expand, the recurring revenue contributions to the overall income stream are bound to rise. But as it stands, this fintech side of the business only represents about a fifth of sales. In other words, Vodafone remains heavily reliant on its telecommunication operations that have significantly tighter margins. After all, the costs of deploying and maintaining a mobile network are not exactly cheap.
My primary concern is the cracks that are beginning to form in the balance sheet. Based on the latest report, Vodafone has around €67.8bn (£57.9bn) of debt to contend with. By comparison, the market capitalisation of the entire business currently stands at just over £31bn. Needless to say, it’s highly leveraged. And with limited cash reserves to meet its short-term obligations, it seems income investors are right to be concerned about the Vodafone share price.
The bottom line
The rise of M-Pesa makes Vodafone look like an exciting opportunity to invest within multiple emerging markets. At least, that’s what I think. However, as promising as the fintech division’s growth prospects may be, Vodafone’s weak balance sheet is quite concerning in my mind. And it may prevent the Vodafone share price from achieving its full potential. So, until the financial health of this business improves, I’ll be keeping it on my watchlist.
