world, but wireless now belongs to
– 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 best service in the nation. Subscriber profits and premium pricing were the spoils.
(T) was on its heels, allowing management to pounce on a stalled entry into the media industry. T-Mobile ( TMUS ) and Sprint were laggards, lacking the scale to compete with the bigger players and forced to rely on cut prices to lure users to inferior networks.
Many things changed as the world moved to 5G. Nearly 2 1/2 years since the Sprint acquisition, T-Mobile’s business is roaring. The erstwhile wireless startup has been winning plaudits for its 5G network and gaining market share, helped by industry-low prices for its mobile plans. Shareholders will also benefit as T-Mobile has completed the most expensive part of its Sprint integration and is preparing to channel excess cash flow into buying back a significant portion of its stock.
Barron’s recommended buying T-Mobile stock in January 2020, and the stock has gained 84% since then, compared to a 34% return for
The stock has returned 25% this year alone — and there are more gains to come.
It’s hard to overstate how much the move to 5G has changed the competitive balance of the U.S. wireless business. The industry is at the beginning of the transition to next-generation networks that provide faster speeds and better performance in congested areas than earlier technologies through the use of more antennas, additional higher frequency airwaves and more great network efficiency.
The move put T-Mobile in first place. T-Mobile’s merger with Sprint, which closed in April 2020, gave the company an enviable portfolio of wireless spectrum licenses in the 5G sweet spot. The combined company’s greater operational, network and customer scale means deeper pockets and more ammunition for network capital expenditures. T-Mobile now has over 100 million subscribers, overtaking AT&T. Its mid-spectrum network covered 235 million Americans at the end of June. And it is spending almost $14 billion on capital spending this year — less than rivals but more than double its pre-merger rate.
Unlike AT&T and Verizon, T-Mobile managed to do all this without raising prices – and continued to report growth in average revenue per user, or ARPU. That’s a function of customers opting for T-Mobile’s more expensive tiers with more features, suggesting it attracts higher-value subscribers. That means T-Mobile could increase profit margins in the coming years — from about 4% this year — catching up with Verizon and AT&T, which have mid-range margins.
Nowhere was T-Mobile’s advantage more clear than during Q2 earnings season. T-Mobile beat your rivals, adding an industry-leading net 1.7 million postpaid customers — a crucial metric for wireless companies that refers to customers who pay a monthly bill — and beating Wall Street estimates on several key metrics. Management has raised guidelines everywhere.
Meanwhile, Verizon barely lives up to expectations, lost postpaid 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 was spent on promotions to drive growth. It also lowered full-year free cash flow guidance.
“T-Mobile delivered the cleanest quarter of the Big Three as management continues to deliver on all fronts,” wrote Morgan Stanley’s Simon Flannery, who named T-Mobile stock his top pick after the reports.
Of course, much of this change has already been reflected in the stock. While T-Mobile shares have held up over the past 12 months, near $147, Verizon has fallen 21% over the past year, to about $43.50 a share, levels last seen in 2017. AT&T is down 8 % over the past year, to about $18. T-Mobile shares trade for just under 10 times enterprise value to next year’s Ebitda, versus about 7.5 times for its two rivals.
Nor are Verizon and AT&T sitting still. Both are also spending heavily on 5G, although both are at a spectrum license disadvantage. They were the biggest spenders in last year’s C-band auction, bidding a total of nearly $70 billion. This medium-frequency spectrum will be a key part of their 5G networks, but is just starting to become available this year and next. Meanwhile, independent research firms consistently rate T-Mobile’s 5G network ahead of Verizon’s or AT&T’s.
Verizon management is confident that a full launch of C-band spectrum and additional densification of their high-frequency mmWave network will close the 5G performance gap with T-Mobile. In late June, Verizon said it had 135 million Americans with C-band coverage, growing to at least 175 million by the end of the year. “We’re on a path to 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 its network operations, so it’s certainly not something one should immediately dismiss,” he says. “But physics is on T-Mobile’s side.”
T-Mobile also has an attractive starting point on its side. Backed by its leadership in 5G, 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 grow to 20% by 2025, from the low teens and high single digits, respectively.
But the biggest boost to profit growth can come from simple inaction. T-Mobile’s management said in July that it expected to finish integrating Sprint’s network by the end of September — up from a previous target of late 2022. It was the costliest part of the acquisition’s integration, which included moving cell sites from one network to another, closing duplicates and transferring former Sprint subscribers to T-Mobile’s network. Merger-related expenses were nearly $1.7 billion in the second quarter alone.
With those costs in the rearview mirror, T-Mobile’s increased customer scale and rising ARPU will translate into free cash flow — paving the way for a massive share buyback program that could be announced later this year .
(DTEGY) owns 48.4% of the shares, with
(9434.Japan) with 3%. The remaining 48.6% of T-Mobile’s market capitalization is roughly $90 billion, against a potential buyback program of $60 billion over four years, according to management’s guidance. That’s huge. The retirement of two-thirds of the shares will increase earnings per share dramatically. As a result, Wall Street analysts expect T-Mobile’s earnings to quadruple, 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 to 2025, according to FactSet.
So, forget T-Mobile’s slight valuation premium over competitors or its recent performance. They only begin to reflect its extremely superior growth trajectory and buyback plans. T-Mobile remains the telecom investor’s best bet.
Write to Nicholas Jasinski c [email protected]