Used to be
world, but wireless now belongs to
— and your actions 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 country. Subscriber earnings and premium pricing were the spoils.
(T) was hot on his heels, allowing the administration to splurge on a since-reversed foray into the media industry. T-Mobile (TMUS) and Sprint were laggards, unable to scale to compete with bigger players, and forced to rely on discounted prices to lure consumers to below-average networks.
A lot has changed as the world has moved to 5G. Nearly 2 1/2 years after acquiring Sprint, T-Mobile’s business is buzzing. The once upstart wireless operator is earning plaudits for its 5G network and gaining market share, helped by low industry prices for its mobile plans. Shareholders will also benefit as T-Mobile completes the most expensive leg of its Sprint integration and prepares to direct excess cash flow to buy back a significant portion of its shares.
Barron’s recommended buying T-Mobile stock in January 2020, and the stock has gained 84% since then, versus a 34% return for the
The stock has returned 25% this year alone – and more gains are to come.
It’s hard to overstate how much the shift to 5G has changed the competitive balance of the US wireless business. The industry is at the beginning of a transition to next-generation networks, which offer faster speeds and better performance in crowded areas than previous technologies, through the use of more antennas, additional high-frequency radio waves, and greater network efficiency. .
The move put T-Mobile in pole position. T-Mobile’s merger with Sprint, which closed in April 2020, gave the company an enviable portfolio of wireless spectrum licenses in the sweet spot for 5G. The larger operational, network and customer base scale of the embedded company means deeper pockets and more ammunition for capital expenditures on the network. T-Mobile now has more than 100 million subscribers, surpassing AT&T. Its mid-band spectrum network covered 235 million Americans at the end of June. And it’s committing nearly $14 billion in capital spending this year — less than rivals but more than double its pre-merger rate.
Unlike AT&T and Verizon, T-Mobile was able to do all of this without raising prices — and continued to see growth in average revenue per user, or ARPU. This is a function of customers choosing T-Mobile’s more expensive tiers with more features, suggesting it is attracting higher-value subscribers. That means T-Mobile could expand profit margins over the next few years – from about 4% this year – approaching mid-life margins Verizon and AT&T.
Nowhere was T-Mobile’s advantage clearer than during the second quarter earnings season. T-Mobile beat out its rivals, adding an industry-leading 1.7 million net postpaid customers — a very important metric for wireless businesses that refers to customers who pay a monthly bill — and beating Wall Street estimates by several important metrics. Management raised guidance at all levels.
Verizon, meanwhile, barely lived up to expectations, lost postpaid subscribers and cut its guidance for the second straight quarter. AT&T saw strong subscriber additions but weak free cash flow as it spent on promotions to drive growth. It also cut free cash flow guidance for the full year.
“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 ranked T-Mobile stock as his top pick after the reports.
Of course, much of this change is already reflected in actions. While T-Mobile stock has held its value over the past 12 months at close to $147, Verizon has dropped 21% last year to about $43.50 a share – levels last seen in 2017. AT&T is down 8% last year to about $18. T-Mobile shares are worth just under 10 times the company’s value for next year’s Ebitda, versus about 7.5 times for its two rivals.
Neither Verizon nor AT&T are idle. Both are also spending big on 5G, although both are at a spectrum license disadvantage. They were the biggest spenders in last year’s C-band auction, offering a total of nearly $70 billion. That mid-band spectrum will be a key part of their 5G networks, but it’s just starting to become available this year and next. Meanwhile, independent analyst firms have consistently ranked T-Mobile’s 5G network ahead of Verizon or AT&T.
Verizon’s management is confident that the full rollout of the C-band spectrum and the further densification of its high-frequency mmWave network will close the 5G performance gap with T-Mobile. In late June, Verizon said it had 135 million Americans covered by the C-band, rising to at least 175 million by year’s end. “We have 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 telecoms analyst Craig Moffett, aren’t so sure. “Verizon has a track record of excellence in its network operations, so it’s certainly not something you should immediately dismiss,” he says. “But physics is on T-Mobile’s side.”
T-Mobile also has an attractive starting point. Supported by its 5G leadership, management is focused on increasing market share in rural areas and among enterprise customers, where T-Mobile and Sprint have historically lagged behind Verizon and AT&T. There’s a long way to go 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 the high singles, respectively.
But the biggest impetus to profit growth can come from simply doing nothing. T-Mobile management said in July that it expects to complete the Sprint network integration by the end of September — against a previous goal of late 2022. This was the most expensive part of the acquisition integration, involving moving mobile sites. from one network to another, turning off duplicates and transitioning former Sprint subscribers to the T-Mobile network. Merger-related costs were nearly $1.7 billion in the second quarter alone.
Once those costs are in the rearview mirror, T-Mobile’s increased customer scale and increased ARPU will flow into free cash flow – paving the way for a massive share buyback program that could be announced later this year.
(DTEGY) holds 48.4% of the shares, with
(9434.Japan) with 3%. The remaining 48.6% of T-Mobile’s tradable market capitalization is approximately $90 billion, against a potential $60 billion repurchase program over four years, as directed by management. That’s huge. Removing 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 and AT&T’s per-share earnings are expected to be essentially flat. from 2021 to 2025, according to FactSet.
So forget T-Mobile’s light peer review award or its recent run. They are barely beginning to reflect their far superior growth trajectory and buyback plans. T-Mobile remains a telecom investor’s best bet.
write to Nicholas Jasinski at email@example.com