Telefônica Brasil SA (NYSE: VIV) (“VIVO”), which operates the Vivo brand in Brazil, is Brazil’s largest telecommunications company and the ninth largest brand in Brazil. Vivo provides voice services (fixed and mobile), fixed/ultra/broadband, pay-TV, IT services and various digital services. The company has 97 million mobile lines in operation, accounting for 38% of the market. This includes 95.2% of Brazil’s population with 4G and 85.5% with 5G networks. The company is present in 12 countries in Europe and Latin America.
Telefónica Brazil operates over 1,700 stores in Brazil and has 19 million users on its app. This stock is an attractive pick for several reasons:
This industry has ample growth potential in Brazil, and Vivo is moving ahead in high-class areas
Telecom is a great industry to invest in during inflation/recession, and this stock is a great defensive option that can outperform banks and exchange-traded funds (“ETFs”).
VIV has aggressive growth plans and a solid track record of growth
The valuation is still attractive even on the basis of historical parameters.
The decline from the Q1-Q2 peaks made it a more attractive entry point for Vivo, as the stock could trade at more than 2x revenue under more optimistic conditions.
Brazilian market appeal
Brazil has a lucrative telecommunications market because of its favorable demographics and largely SMEs that are undergoing digital transformation. Also, rising incomes in the future may help fuel additional growth, especially as a large % of the population has enough room to increase spending on phones/internet/etc.
SME Growth Opportunities: There is enough room for such companies to target small SMEs by offering services. Companies like Vivo can also benefit from expanding into rural areas, and can acquire new customers whose products are not exposed to. This change is likely to be realized by 2024-2025.
DemographicsAnother noteworthy fact is that about 20% of Brazil’s population is 14 years of age or younger. This fact advances the “favorable demographics” thesis that emerging markets attract capital flows. As a result growth in this sector could peak in 5–10 years, as incomes increase and more young consumers start spending more in their 20s.
rapid growthEmerging markets are experiencing a setback in growth, and this has affected a number of industries, including banking. However, sectors such as ICT are more flexible, as consumers are not very price sensitive and have limited choices. Brazil’s ICT sector grew by 18% in 2021 and now accounts for about 6.9% of GDP.
Regions such as Southeast Asia and Latin America have substantial growth potential in this decade, as a large percentage of consumers are still not fully exposed to telecommunications.
Telefonica Brasil Outlook
Telefonica Brasil is poised to capture some of the industry growth and maintain its leading industry position in Brazil.
Fiber segment extension
Brazil’s current fiber penetration is 26%, while broadband penetration is around 63%. Vivo is aggressively expanding into fiber with a 27% CAGR, and plans to reach 29 million homes in Brazil by 2024.
This is an ambitious but achievable goal, given that the government of Brazil is committed to improving access for the rural population. In line with Brazil’s normalization plan for universal goals, about 5,500 municipalities in Brazil will have access to fiber-optic coverage. If Brazil meets its plans, about 99% of Brazilians will have access to this coverage. In addition, the 29 million households only represent about 13-14% of Brazil’s population. Even a CAGR of 10% will allow VIV to house 24.4 million by Q3 2024. VIV plans to focus on mid-sized cities, but will expand to other areas where it does not currently provide services. The market is somewhat competitive, and Vivo will have to take market share from smaller players. The top 3 companies control around 53-54% of the fixed broadband market, while there is an abundance of regional players with 1-3% market share.
Mobile segment: Stable, but no growth story
This segment will not be strong as a growth driver, given that a large percentage of Brazil’s population already has access to mobile devices.
Most people in Brazil have a smartphone, and users spend a lot more time online on their mobile devices than in other countries.
Homes in Brazil with internet access increased from 51% in 2019 to 71% in 2021. There is room for additional growth in the coming years as companies expand into rural areas.
Vivo is also well positioned in these four high-growth areas, which still have room for growth during the next decade.
Another interesting part of Vivo’s business is its digital services segment, which essentially gives investors exposure to financial services, health, eCommerce and even education:
Brazil is an exceptional country globally due to the country’s very rapid adaptation to digital banking services. Banks in Brazil have had to respond by changing their business models or by acquiring smaller competitors.
The demographic profile of Brazil is also very attractive for education. Vivo recently signed a contract with Anima Educao to provide digital courses on lifelong learning and employability.
Covid-19 resulted in legal changes in Brazil in 2020, which allowed telemedicine to start gaining traction in the country.
Ecommerce is growing rapidly in Latin America, and the penetration rate is still low.
Vivo is an interesting value stock in Brazil, which will likely experience slight declines in the coming years during any shortfalls seen in emerging markets. I mentioned it in this article, which covered banks in Brazil and showed how consumer stocks were a better bet.
Vivo is currently undervalued as much as it was following the bottles it experienced after Covid-19 and Russia’s invasion of Ukraine. The major risks of investing in VIV include the following:
- Emerging Markets Macro Risk: The increased inflation and heightened political risks seen in countries such as Sri Lanka and Turkey will likely increase, resulting in capital fleeing from riskier equities.
- Forex: Vivo is exposed to currency risks (especially the euro) as it operates in more than 10 countries.
- The Brazilian economy will grapple with high inflation and risks of recession. The elections in Brazil are approaching, and the political risk ahead in Brazil will not be a unique event in LATAM.
- Heightened political risks in China and Taiwan will lead to global tensions and EM outflows, as China and Taiwan are the two largest countries in the MSCI emerging markets, accounting for 47% of the MSCI Emerging Markets Index.
I plan to accumulate Vivo shares during any pullback experience this year.