Goldman Sachs added T-Mobile US stock to its list of best ideas in telecom for 2022. That spot on the roster came at the expense of Verizon.
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T-Mobile US stock caught a bounce on Tuesday, after Goldman Sachs analysts added the wireless-services company’s shares to their list of best ideas in telecom for 2022. That spot on the roster came at the expense of Verizon Communications , whose stock declined on Tuesday.
T-Mobile (ticker: TMUS) stock was up 3.2% in midday trading on Tuesday, while Verizon’s (VZ) lost 0.9% and the S&P 500 index rose 0.5%.
Covid-19 provided a big boost to subscriber growth among wireless-services providers in late 2020 and through 2021. Americans relying more on their phone and internet plans for entertainment and work during the pandemic made it an attractive time to switch or upgrade. Government stimulus payments and lots of consumer savings added to demand. Same goes for the cable industry.
Goldman Sachs’ Brett Feldman sees that industrywide growth tailwind weakening in 2022, just as competition is picking up: “Following periods of record growth in postpaid phone and cable broadband subscribers, driven by lockdowns and stimulus, we expect deceleration in both of these core telecom services in 2022,” he wrote on Tuesday. “Further, as wireless, cable and fiber providers increasingly compete with each other across mobile and fixed services, we expect investors to maintain a cautious outlook for these end-markets.”
Feldman estimates 9.3 million industrywide postpaid phone net adds in 2021, up from 6.2 million in 2020, and 6.4 million in 2019. That would represent a record year for the closely watched metric, which includes subscribers using smartphones who pay a monthly bill. But the good times won’t last forever: Feldman expects a 20% decline to 7.4 million net adds in 2022.
Telecom stocks broadly declined in late 2021, as investors fretted over the subscriber-growth outlook. That has left many with much cheaper valuations, and possible opportunities for investors, per Feldman.
He’s particularly bullish on the wireless industry “challengers:” T-Mobile and the cable companies’ mobile virtual network operator, or MVNO, offerings. Those include Comcast
‘s (CMCSA) Xfinity Mobile and Charter Communications’ (CHTR) Spectrum Mobile. The companies don’t own their own wireless network infrastructure, but instead have wholesale agreements with Verizon to provide service on its network.
If industrywide subscriber growth becomes more scarce, then the most competitive offerings for consumers should be best off, Feldman argues. From a purely price perspective, T-Mobile and the cable MVNOs tend to undercut equivalent services from incumbents Verizon and AT&T (T).
T-Mobile will have the extra benefit of continued progress on its integration of Sprint’s operations, customer base, and network in 2022, which it has been working on since acquiring its smaller competitor in 2020. That means cost savings and less of a headwind from former Sprint customers canceling when their service or account changes.
That should open up the discussion of share buybacks by the second half of the year, Feldman predicts. T-Mobile management has said the company’s post-Sprint integration annual free cash flow could exceed $18 billion by 2026, after steadily ramping toward that figure. They’ve also spoken about the possibility of $60 billion of share buybacks from 2023 to 2025—versus a current market value of about $135 billion.
T-Mobile stock has declined about 27% since mid July (a large customer-data breach didn’t help either), while the S&P 500 has risen 8%. The shares now trade for 7.8 times enterprise value to Feldman’s estimate for 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda. That compares with Verizon stock’s trading at 7.6 times the same metric. When adjusted for expected synergies and capital expenditures, T-Mobile’s stock is at a discount to Verizon’s, per Feldman’s math. Same goes when using 2023 estimates or focusing on free cash flow per share rather than Ebitda.
“For all of these metrics, we view TMUS’s relative valuation vs. VZ’s as attractive as we expect that T-Mobile will grow materially faster than Verizon, based on our outlook for sustained share gains,” Feldman wrote.
He believes that T-Mobile’s stock valuation should be closer to Charter’s, which has a more similar growth outlook. Feldman has a Buy rating and $153 price target on T-Mobile, based on 9.5 times 2022 estimated Ebitda, 15 times 2022 estimated free cash flow per share, and his discounted cash flow model.
That’s roughly 40% upside from current levels around $109 per share, and earned T-Mobile a spot on Feldman’s “Conviction List.” He still has a Buy rating on Verizon stock, but removed it from the list given concerns about subscriber growth this year. His $63 price target is about 18% above Verizon stock’s recent level.
Feldman’s other best ideas in telecom in 2022 include Comcast and Frontier Communications (FYBR).
Write to Nicholas Jasinski at [email protected]
