The Vodafone (LSE:VOD) share price has been on a bit of a rollercoaster ride these past 18 months. After initially crashing along with the market back in March 2020, the telecommunications stock started to recover. But this upward trajectory reversed itself in April this year. And today, the Vodafone share price sits around 117p, roughly at the same level as 12 months ago.
But despite the stock’s volatility, it might be on the verge of exploding far beyond pre-pandemic levels. Let’s take a closer look at this business’s hidden potential and whether I should be adding it to my portfolio.
Growth potential for the Vodafone share price
Last week the company released its latest earnings report that showed whopping revenue growth of … 5.7%. That’s hardly exciting, but for a boring blue-chip telecommunications company, it pretty much met most investors’ expectations. And Vodafone’s share price experienced a slight boost following the release.
But, going further into the numbers, it seems Vodafone might be transforming itself into a fintech stock. Over a decade ago, it launched M-Pesa, a mobile money platform that enables transfers between non-smartphones. It’s virtually useless in the western world. But in places like Africa, it has become the standard method of payment. According to Business Daily Africa, the technology is one of the main catalysts behind the transformation of Kenya’s economy.
M-Pesa now has 49.7 million users across the seven African nations it’s deployed in, with €4.5bn moving through its network in the last three months alone. That’s 45% higher than a year ago. And with plans to expand into Ethiopia and South Africa, this growth doesn’t look like it’s about to slow down anytime soon.
The risks that lie ahead
As exciting as this potential is, there remains a long road ahead. As of the latest quarter, M-Peso represents roughly 20% of the overall revenue stream. That’s certainly a significant chunk. But the business remains predominantly a telecommunications company. And not a particularly healthy one.
Building and operating its infrastructure has been an expensive endeavour. So much so that the total debt on the balance sheet now stands at €67.7bn. That’s nearly double Vodafone’s market capitalisation based on its share price today. Consequently, the interest payments it has to find are gobbling up a large portion of the company’s underlying profits. It certainly doesn’t help that rising inflation may lead to an eventual increase in interest rates that could drastically impact its bottom line.
To me, M-Pesa looks like it has the potential to send Vodafone’s share price surging over the long term. But as exciting as the opportunity is, it’s far from certain. And with an enormous pile of debt to contend with, funding future expansion may prove tricky, slowing down the process.
For now, I’m keeping Vodafone on my watchlist until the management team can improve the business’s solvency.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.