T-Mobile remains an investor’s best bet in telecom. Here, customers at a T-Mobile store in Mammut mall in Budapest.
Akos Stiller/Bloomberg
It used to be Verizon Communication ’s world, but wireless now belongs to T-Mobile US
—and its stock will continue to benefit.
Verizon (ticker: VZ) was the undisputed winner of the 4G era, investing heavily in its network infrastructure and wireless spectrum licenses to build the nation’s best service. Subscriber gains and premium pricing were the spoils. AT&T (T) was hot on its heels, allowing management to splurge on a since-reversed foray into the media industry. T-Mobile (TMUS) and Sprint were laggards, without the scale to compete with bigger players, and forced to rely on discounted pricing to attract consumers to subpar networks.
A lot has changed as the world has moved on to 5G. Nearly 2½ years removed from its acquisition of Sprint, T-Mobile’s business is humming. The once-upstart wireless carrier is winning plaudits for its 5G network and gaining market share, helped by industry-low pricing for its mobile plans. Shareholders will benefit, too, as T-Mobile finishes the most costly stretch of its Sprint integration and gets ready to direct surplus cash flow toward buying back a significant portion of its shares.
Barron’s recommended buying T-Mobile stock in January 2020, and the shares have gained 84% since then, versus a 34% return for the S&P 500. The stock has returned 25% just this year—and more gains lie ahead.
It’s difficult to overstate how much the shift to 5G has changed the competitive balance of the U.S. wireless business. The industry is in the early innings of a transition to next-generation networks, which deliver faster speeds and better performance in crowded areas than earlier technologies through the use of more antennas, additional higher-frequency airwaves, and greater network efficiencies.
The move has put T-Mobile in the pole position. T-Mobile’s merger with Sprint, which closed in April 2020, has given the company an enviable portfolio of wireless-spectrum licenses in the sweet spot for 5G. The greater operational, network, and customer-base scale of the merged company means deeper pockets and more ammo for capital expenditures in the network. T-Mobile now has well over 100 million subscribers, leapfrogging AT&T. Its midband-spectrum network covered 235 million Americans at the end of June. And it’s committing almost $14 billion to capital expenditures this year—less than rivals but more than double its premerger rate.
Unlike AT&T and Verizon, T-Mobile has managed to do all this without raising prices—and it has continued to see growth in average revenue per user, or ARPU. That’s a function of customers choosing T-Mobile’s pricier tiers with more features, suggesting it’s attracting higher-value subscribers. It means T-Mobile can expand profit margins in coming years—from some 4% this year—approaching Verizon and AT&T, which have midteens margins.
Nowhere was T-Mobile’s advantage more clear than during second-quarter earnings season. T-Mobile trounced its rivals, adding an industry-leading net 1.7 million postpaid customers—an all-important metric for wireless companies that refers to customers who pay a monthly bill—and beating Wall Street estimates on several key metrics. Management raised guidance across the board.
Verizon, meanwhile, barely matched expectations, lost postpaid phone subscribers, and cut its guidance for the second quarter in a row. AT&T saw strong subscriber additions but weak free cash flow, as it spent on promotions to drive growth. It also cut full-year free cash flow guidance.
“T-Mobile delivered by far the cleanest quarter of the Big Three, with management continuing to execute on all fronts,” wrote Morgan Stanley’s Simon Flannery, who called T-Mobile stock his top pick after the reports.
Of course, a lot of this shift is already reflected in the shares. While T-Mobile stock has held its value over the past 12 months, near $147, Verizon is down 21% over the past year, to around $43.50 per share—levels last seen in 2017. AT&T has slid 8% over the past year, to around $18. T-Mobile stock goes for just under 10 times enterprise value to next year’s Ebitda, versus around 7.5 times for its two rivals.
Nor are Verizon and AT&T sitting still. Both are also spending heavily on 5G, though both are at a spectrum-license disadvantage. They were top spenders in last year’s C-band auction, bidding a combined nearly $70 billion. That midband spectrum will be a key part of their 5G networks, but it’s only beginning to become available this year and next. Meanwhile, independent analytics companies have consistently rated T-Mobile’s 5G network ahead of Verizon’s or AT&T’s.
Verizon management is confident that the full launch of the C-band spectrum and additional densification of their higher-frequency mmWave network will close the 5G performance gap with T-Mobile. At the end of June, Verizon said it had 135 million Americans covered by C-band, rising to at least 175 million by year end. “We have a path to a very, very strong network performance,” Verizon CFO Matt Ellis said on the company’s second-quarter earnings call in late July.
Others, like veteran telecom analyst Craig Moffett, aren’t so sure. “Verizon has a history of excellence in their network operations, so it’s certainly not something that one should dismiss out of hand,” he says. “But the physics are on T-Mobile’s side.”
T-Mobile also has an attractive starting point on its side. Supported by its 5G lead, management is focused on growing market share in rural areas and among business customers, where T-Mobile and Sprint have historically lagged behind Verizon and AT&T. There’s a long runway for subscriber growth there: Management expects T-Mobile’s share of rural and business customers to rise to 20% by 2025, from the low teens and high single digits, respectively.
But the biggest boost to profit growth might come from simply doing nothing. T-Mobile management said in July that they expect to be done with the Sprint network integration by the end of September—versus a previous goal of the end of 2022. That has been the costliest portion of the acquisition integration, involving shifting cell sites from one network to the other, shutting down duplicative ones, and transitioning former Sprint subscribers to the T-Mobile network. Merger-related costs were almost $1.7 billion in the second quarter alone.
Once those costs are in the rearview mirror, T-Mobile’s increased customer scale and rising ARPU will flow through to free cash flow—opening the way for a massive share-buyback program that could be announced later this year.
Deutsche Telekom (DTEGY) owns 48.4% of shares, with SoftBank (9434.Japan) holding 3%. The remaining 48.6% of T-Mobile’s tradable market capitalization is roughly $90 billion, versus a potential $60 billion buyback program over four years, per management guidance. That’s huge. Retiring two-thirds of the stock’s float will dramatically increase earnings per share. As a result, Wall Street analysts expect T-Mobile’s earnings to grow fourfold, from $2.41 in 2021 to $11.54 in 2025. Verizon’s and AT&T’s earnings per share are expected to be essentially flat from 2021 through 2025, according to FactSet.
So, forget T-Mobile’s slight valuation premium over peers or its recent run. They barely begin to reflect its vastly superior growth trajectory and buyback plans. T-Mobile remains an investor’s best bet in telecom.
Write to Nicholas Jasinski at [email protected]
