New York, USA – September 16, 2023: A T-Mobile store in Manhattan. Photo: Michael… [+] Kappeler/dpa (Photo: Michael Kappeler/picture alliance via Getty Images)
dpa/picture alliance via Getty Images
T-Mobile reported better-than-expected first-quarter profits thanks to several tailwinds from its acquisition of rival Sprint in 2020. Earnings were $2.00 per share, while revenue was roughly flat at $19.59 billion. So what’s next for T-Mobile stock?
T-Mobile continued to lead the industry in postpaid phone net adds, adding 532,000 connections during the quarter. While net adds were down slightly compared to the same period last year, they remain among the highest in the industry. Additionally, T-Mobile is capturing a higher share of the industry’s net customer adds thanks to its deployment of valuable mid-band spectrum for 5G wireless technology. Mid-band spectrum offers a better balance of speed and coverage compared to the mmWave spectrum (which offers super-fast speeds but weaker coverage) that rivals from Verizon and AT&T initially focused on.
T-Mobile is also making steady inroads in the broadband market with fixed wireless broadband services, using the excess spectrum it acquired in its Sprint deal. In the most recent quarter, the company added an industry-best 405,000 subscribers, bringing its wireless broadband customer base to a total of nearly 5 million. The company also plans to move into the wired broadband space, partnering with private equity firm EQT to acquire Mid-Atlantic fiber-optic network operator Lumos. T-Mobile plans to expand Lumos’ fiber-optic network from about 320,000 connections today to a total of 3.5 million by the end of 2028.
The company also saw a significant improvement in profitability as it decommissioned legacy Sprint cell sites and completed the integration of its two networks. Free cash flow for the first quarter increased about 39% year over year to $3.3 billion.
TMUS stock has risen by a strong 20% from $135 in early January 2021 to about $165 today, compared to the S&P 500’s rise of about 35% over the past three years. However, TMUS stock’s rise has not been consistent. The stock’s returns were -14% in 2021, 21% in 2022, and 15% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023, indicating that TMUS underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500, in good times and bad, has become harder for individual stocks in recent years. For the biggest names in the communications services sector, such as GOOG, META, and NFLX, as well as mega-cap stars such as TSLA, MSFT, and AMZN, they have outperformed the S&P 500. In contrast, the Trefis High Quality Portfolio of 30 stocks has outperformed the S&P 500 every year over the same period. Why is that? As a group, the stocks in the HQ portfolio have offered better returns with lower risk compared to the benchmark index. There has been less of a rollercoaster ride as evidenced by the HQ portfolio’s performance metrics. Given the current uncertain macroeconomic environment of high oil prices and rising interest rates, will TMUS face a similar situation in 2021 and 2023 and potentially underperform the S&P over the next 12 months, or will it rally substantially?
T-Mobile’s price-to-earnings ratio looks expensive relative to its peers. The company’s stock trades at about 18 times expected earnings, well above rivals AT&T and Verizon, both of which trade at high single-digit multiples. That said, we think the multiple is reasonable. T-Mobile has traditionally been known for its customer-friendly policies and value pricing, but with the introduction of 5G, it has also emerged as one of the best networks with wide and fast coverage. This should enable the company to grow at a faster pace compared to rivals AT&T and Verizon, and the closure of the Sprint network could help improve margins. Additionally, free cash flow is expected to grow from $16.4 billion to $16.9 billion in 2024, and the stock trades at less than 12 times adjusted expected free cash flow. T-Mobile’s stock is valued at approximately $176 per share, which is about 7% higher than the current market price. For more information on the factors that drive our price forecast, see our “Expensive or Cheap” valuation analysis of T-Mobile. Additionally, our revenue analysis provides details on the company’s key business segments and revenue trends.
Comparison of TMUS returns with Trefis Enhanced Portfolio
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