The Key Risks To T-Mobile’s Stock

T-Mobile (NASDAQ:TMUS), the third largest and fastest-growing U.S. wireless carrier, has seen its stock rally by close to 25% over the last three months, driven by its continued strength in the postpaid phone space as well as growing optimism surrounding the carrier’s M&A prospects. However, despite the company’s strong recent financial and market performance, there are some risks. Below we discuss the primary risks to the company’s valuation.

Trefis has a $50 price estimate for T-Mobile, which is roughly 15% below the current market price.

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T-Mobile Is Playing The Pricing Card Again

T-Mobile’s postpaid phone ARPU is among the lowest in the industry, and there is a possibility that it could continue to lag rivals in the near term. While the carrier replaced its tiered data plans with a new unlimited plan called T-Mobile One last September, potentially increasing ARPUs for the most frugal users ($160 for 4 lines on One versus $120 for 4 lines on its most popular tiered plan), it recently modified the plan to incorporating all-in pricing. Under the all-in scheme, taxes and fees will be included in the original advertised price, effectively translating into lower ARPU. T-Mobile is also locking in pricing for One customers, guaranteeing that it will not raise prices down the road. Much like other carriers, T-Mobile has also resumed paying subsidies toward smartphone purchases in some cases. For instance, the limited period iPhone 7 trade-in promotion offered net subsidies of as much as $450, while still offering customers the low wireless service fees that come with contract-free plans. This is likely to impact the carrier’s equipment revenue.

Smaller Rival Sprint Is Slowly But Surely Gaining Traction

Sprint, the fourth largest nationwide carrier, is slowly turnings around its once struggling business, posting postpaid phone subscriber additions, driven by an improving network and promotional activity. The carrier added 542k postpaid phone subscribers over the first nine months of 2016. Although this is well below the ~2.4 million subscribers T-Mobile added in the same period, the carrier does appear to be putting some pressure on T-Mobile. Sprint was net port positive versus T-Mobile in the last two reported quarters, meaning that it won over more subscribers from T-Mobile than it lost to it. There is a possibility that T-Mobile moved to reduce pricing on its One plans (via all-in pricing) to counter Sprint’s budget unlimited plan. T-Mobile One is now priced at $70 for a single line, including fees and taxes, while Sprint’s plan is priced at $60 for a single line, excluding fees and taxes.

A Potential Merger May Already Be Priced In, Limiting Upside

There is a possibility that T-Mobile could be acquired or merge with another company, with parent company Deutsche Telecom indicating that it was open to pursuing a deal after the completion of the ongoing spectrum auction and rival Sprint maintaining that it was still interested in a buyout (related: Why A Sprint T-Mobile Merger Would Make Financial Sense). Moreover, with the election of Donald Trump to the U.S. Presidency, investors are betting that Washington will be more amenable to consolidation within the telecommunications industry. T-Mobile’s stock appears to have priced in much of the M&A chatter, as the stock is up by close to 10% since the election results came out in November. There is a risk that the carrier’s stock price could correct if a merger does not eventually materialize.