What’s Driving Our $70 Price Estimate For T-Mobile?

T-Mobile (NASDAQ:TMUS), the third-largest U.S. wireless carrier, has performed well over the last few years, driven by its clever branding, value-added offerings, and attractive pricing, which have given the company an edge in winning over new customers. We have a $70 price estimate for T-Mobile, which translates to about 16.5x our 2019 EPS estimate for the company. In this note, we take a look at how the company’s major segments are expected to perform over the next two years. We have also created an interactive dashboard analysis, which you can use to arrive at your own price estimate for T-Mobile stock.

Postpaid Growth Will Continue On Coverage Expansion 

T-Mobile’s postpaid subscriber adds should continue to lead the industry, driven by its improving coverage in rural and suburban areas (leveraging its 600 Mhz spectrum) and its brand momentum. T-Mobile could also take steps to shore up ARPU. Late last year, the company raised prices on its high-end unlimited plans, bringing them about in line with Verizon, and it’s possible that it could do the same with other plans going forward.

Service margins should remain relatively flat in the near term, as the effects of improved economies of scale from customer growth are mitigated by the company’s network expansion plans, which could raise service costs.

Prepaid Business Will Expand Driven By MetroPCS

T-Mobile’s prepaid business should grow going forward, driven by its MetroPCS brand, while ARPU is also likely to improve, as the data attach rates rise for prepaid plans. The carrier has also been aggressively expanding its retail footprint, allowing it to market its prepaid products to a wider audience. It projected 5,400 stores by the end of 2017, up from 3,900 stores at the end of 2016. However, growth could slow in the longer term due to competition from Sprint, which has also been focusing on improving its prepaid subscriber base.

Valuation Based On 2019 P/E

We have a $70 price estimate for T-Mobile,  which translates into a valuation of 16.5x our 2019 EPS estimate for the company. Our price estimate is about 10% ahead of the current market price.

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