Initiating Coverage Of T-Mobile With A $44 Price Estimate
T-Mobile U.S. (NASDAQ:TMUS) is the third largest wireless communications services provider in the United States, providing voice, messaging and data services to over 63 million customers in the postpaid, prepaid and wholesale markets. The company is majority-owned by Deutsche Telekom AG, which maintains a stake of about 66%. T-Mobile U.S. was formed through the business combination between T-Mobile USA and MetroPCS Communications, a prepaid wireless operator in April 2013.
We are launching coverage of T-Mobile with a price estimate of $44, which is about 10% above its current market price. In our analysis, we have broken down the company into the following divisions:
- Postpaid Mobile Plans & Phones – 65% of value
- Prepaid Mobile Plans & Phones – 28% of value
- Wholesale and Other – 7% of value
In this note, we take a brief look at the company’s key valuation drivers.
Key Valuation Drivers:
Industry Leading Postpaid Customer Growth
The postpaid wireless phone business represents the single most lucrative segment of the wireless market, owing to its higher ARPU (average revenue per user) and lower churn levels. T-Mobile has led the industry in terms of overall postpaid net adds in recent years, with its postpaid offering holding 9.3% of the U.S. wireless market, up from just about 6.7% in 2012. T-Mobile captured nearly all of the U.S. wireless industry’s postpaid subscriber growth in 2015, adding a total of 3.5 million subscribers. Although this growth has come at the cost of lower service ARPU (down 17% since 2011), it has helped T-Mobile improve its EBITDA, since wireless is a high-fixed cost business.
Much of T-Mobile’s recent success can be attributed to the launch of its “Un-carrier” initiative in 2013, under which it offered affordable wireless plans that came without the two-year contracts that were prevalent in the industry, while offering customers freedom on how they choose to buy devices. T-Mobile has also been at the forefront of offering many value-added services such as free international data roaming on its Simple Choice Plans at no additional cost. The other three carriers have followed suit, beginning to abandon the contract/subsidy model during 2015, but T-Mobile may have an edge in winning over new customers owing to its clever branding, lower pricing and value-added offers. We expect T-Mobile’s postpaid share of the U.S. wireless market to increase to about 10.6% by 2022.
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Improving Network Quality & Coverage
Network quality and pricing remain the biggest differentiating factors in the wireless business. While T-Mobile has historically lagged Verizon and AT&T, particularly outside of urban areas, it has competed by offering lower-priced plans and attractive equipment offers. However, the carrier has been making significant progress with its coverage over the last few years, driven by its growing low-band spectrum interests and network infrastructure spending. For instance, T-Mobile says that its 4G LTE service is now available to more than 300 million users, approaching the penetration levels of its larger rivals. T-Mobile bought some 700MHz A-Block airwaves from Verizon in 2014 and is also expected to be a big player in the FCC’s ongoing incentive auction, which will shift valuable airwaves in the 600MHz range from television broadcasters to wireless carriers. T-Mobile previously indicated that it could spend as much as $10 billion on the auction, buying enough low-band spectrum to cover the entire country.
This could help T-Mobile strengthen its network performance, enter new markets and potentially improve pricing power and margins. If the carrier is able to match Verizon and AT&T in terms of network performance in the medium-term, there is likely to be a significant upside to the stock. We forecast that T-Mobile’s postpaid wireless ARPU to grow from about $48 in 2015 to about $52 in 2022. We estimate that Service EBITDA margins will rise from 55% in 2015 to about 57% in 2022.
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