What’s Behind >140% Surge In T-Mobile’s Stock Price In The Last 4 Years?

by Trefis Team
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T-Mobile U.S. (NASDAQ: TMUS) saw its stock price rise by a whopping 143% over the last 4 years, from $35 in February 2016 to about $85.44 as of February 7, 2020. This rise was primarily driven by net income margin almost doubling over this period, driven by a steady drop in cost of services and lower interest outgo. Additionally, the company’s top line has also expanded due to healthy growth in postpaid revenues. We break down the movement in T-Mobile’s stock price into four factors: growth in revenue, change in share count, expansion in P/E multiple, and change in net income margin. You can look at our interactive dashboard analysis What Factors Drove Over 143% Growth In T-Mobile’s Stock In The Last 4 Years?

A] Revenue Growth

  • T-Mobile has added over $6 billion to its revenue base between 2016 and 2019.
  • Total Revenue has grown 20.8% from $37.2 billion in 2016 to almost $45 billion in 2019, and is further expected to grow by 5.3% to around $47.4 billion in 2020.
  • Revenue growth of about $2.4 billion in 2020 is likely to be driven by about $1.7 billion from Postpaid services, $500 million from Prepaid services, and $242 million from Wholesale services.
  • Overall, Postpaid Plans & Phones revenue increased from $24.1 billion in 2016 to $29 billion in 2018, driven by higher revenues from postpaid mobile plans and equipment. We expect revenue to grow by 5.7% to about $30.7 billion in 2020, driven by growth in postpaid revenues.
  • T-Mobile also appears to be doing a better job at retaining customers. In 2019, T-Mobile’s branded postpaid phone churn stood at 0.85%, marking a decline of 17 basis points year-over-year. This is likely being driven by the company’s improving customer service as well as moves to bundle video services such as Netflix with family plans. Going forward, we expect the launch of 5G to accelerate subscriber growth.
  • Prepaid service revenue increased from $11.3 billion in 2016 to $13.1 billion in 2019, with growth expected to continue in 2020 driven by increasing sales of prepaid phone plans and equipment.

View the Trefis interactive dashboard on T-Mobile U.S. Revenues for more details on the company’s revenue segments and performance

B] Net Income Rise

  • Net income more than doubled from $1.5 billion in 2016 to $3.5 billion in 2019, with a sharp rise in 2017 driven by one-time tax benefits realized due to the TCJ Act. We expect net income to rise to $3.9 billion by 2020.
  • Net income margin increased from 3.9% in 2016 to 11.2% in fiscal 2017. This was followed by a drop to 6.7% in 2018 and rise to 7.7% in 2019.
  • This was due to revenues increasing at a faster rate compared to expenses over the last four years.
  • Total Expenses as % of revenue has largely decreased from 96.1% in 2016 to 92.3% in 2019, with the fall being sharp in 2017 due to tax benefits received.
  • Notable changes can be seen in effective tax rate and steady reduction in COGS as % of revenue, along with lower interest expense due to redemption of $2.4 billion of Senior Notes, which has led to a rise in profitability.

C] Rise in EPS

  • T-Mobile’s EPS has also increased from $1.75 in 2016 to $4.02 in 2019 in line with the rise in margins.
  • Shares outstanding have been range bound between 830 million to 865 million during this period, having negligible impact on EPS.

D] Expansion of P/E Multiple

  • T-Mobile’s P/E multiple expanded from 18.5x in February 2016 to 20x in February 2020.
  • This compares with AT&T which saw its P/E drop slightly from 18.1x to 16.8x, while Verizon’s P/E remained stable at 15.6x over this period.
  • However, T-Mobile’s current P/E multiple is higher than both AT&T and Verizon.
  • P/E multiple expansion has been mainly driven by continuous rise in revenues, margin expansion, and positive outlook due to 5G rollout.

As per T-Mobile U.S. Valuation by Trefis, we have a price estimate of $88 per share for T-Mobile’s stock.

 

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