Goldman Sachs Flags Top European Telecom Stocks With Amplified Upside Potential

Goldman Sachs has increased its optimism towards European telecom stocks, highlighting potential for substantial equity gains. The firm's Digital Infrastructure team has updated its stock selection strategy to focus on leverage and improved relative returns. In its latest report, they singled out BT, Deutsche Telekom, Telefonica, and Vodafone as their top higher-risk/reward Buy targets, emphasizing that each of these companies offers significant upside amplified by financial leverage, while acknowledging the additional company-specific risks they present.

Within the group, BT stands out with the highest upside potential at 62%, and a price target of 330p. This optimism stems from the strong fiber monetization prospects at BT's wholesale broadband unit, Openreach, which the firm expects to drive Free Cash Flow (FCF) estimates roughly 20% above consensus for the fiscal year ending in 2027.

Goldman predicts a rebound in broadband line losses and Group revenue growth, reaching just under 2% by the fiscal year 2029, although they caution that competition from alternative internet providers (Altnet) could pose a significant risk to this narrative.

Deutsche Telekom is estimated to deliver 41% upside potential, with a €40 target price. The firm's confidence is anchored in Deutsche Telekom's strong ties with T-Mobile US, which is expected to generate around 80% of DT's free cash flow by 2027. Goldman remains confident that concerns over a potential merger between DT and T-Mobile US, coupled with satellite competition, will diminish as T-Mobile US continues to enjoy robust growth.

Telefonica is rated as a Buy by Goldman with a 34% upside potential, and a €4.90 price target. This positive outlook is driven by an improving growth outlook in Spain and Brazil, alongside ongoing cost-cutting initiatives. Goldman's EBITDA forecasts for Telefonica are 1-3% above consensus for 2026-2028, and the firm also highlights potential value-creating consolidation opportunities in Germany or Spain. However, they caution that Telefonica's near-term financing risk is elevated due to any potential M&A activity.

Vodafone has been upgraded to "Buy" from "Sell," with a 30% upside potential and its target price raised to 155p. Goldman attributes this upgrade to accelerating Return on Invested Capital (ROIC) improvement, driven by the UK mobile market repair, increased cost-cutting efforts, and sustained growth in Africa. Notably, their estimates are now above consensus for the first time in years.

The firm acknowledges that Vodafone's structural quality remains below the sector average, particularly in light of execution concerns in Germany's fixed broadband market.