T-Mobile Stock Up 10% To $86 Despite COVID-19 Crisis; Is It Sustainable?

by Trefis Team
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After almost a 10% rise in T-Mobile’s (NASDAQ: TMUS) stock since the beginning of this year, at the current price of $86 per share, we believe T-Mobile’s stock has very limited upside even immediately after the coronavirus crisis as the stock has not seen a major drop in the first place. With the stock expected to remain near the current elevated level, it is  benefiting from its recently concluded merger with Sprint to create the third largest telecom giant in the US. The stock is 35% higher than where it was at the end of 2018, less than one and a half years back. Our dashboard What Factors Drove 35% Change In T-Mobile Stock Price Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price rise from 2018 to 2019 is justified by the approximate 4% growth seen in T-Mobile’s revenues, which was further accentuated by an almost 16% increase in net income margin, which increased from 6.7% in 2018 to 7.7% in 2019. These two factors were reflected in the 20% growth in net income during this period. EPS also increased by close to 20% from $3.40 in 2018 to $4.06 in 2019, as shares outstanding remained almost stable.

Further, the company’s P/E multiple increased by over 3% from 18.7x at the end on 2018 to 19.3x at the end of 2019. The rise in P/E multiple during this period was mainly due to rising revenues, higher customer retention, rising margins due to operating efficiency and deleveraging, and a positive outlook for 5G rollout. However, the P/E multiple increased further to 21.2x currently, marking a rise of 13% from its 2018 levels, primarily due to the final approval granted to its merger with Sprint in February 2020. The merger closed on 1st April 2020.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This has, in turn, led to a drop in consumption and spending power. Though the announcement of a global health emergency by WHO on January 31, 2020 led to a drop in markets, T-Mobile saw its stock price rise from $79 on January 31 to over $100 on February 19, 2020. For the company, the exuberance provided by the green light given by the district judge to the T-Mobile and Sprint merger completely trounced the general bearish sentiment in the market. However, as the number of positive COVID-19 cases in the US started multiplying after mid-February, the company’s stock price declined from $100 to $86 currently, which is still higher than its price at the end of 2018 ($64) and 2019 ($78).

Though the drop in consumer spending did not have much of an impact on T-Mobile’s stock price, we believe T-Mobile’s Q1 results will confirm a lower revenue, with its Q2 and 2020 guidance also likely to be brought down (excluding the merger effect). If there are no signs of containment of the virus around the Q1 earnings announcement, there is a possibility of the stock seeing some downside. Since January 31, 2020, T-Mobile’s stock (+8.5%) has outperformed the S&P 500 (-14%) and its major rivals like AT&T (-18%) and Verizon (-3%). Thus, if there are clear signs of virus containment of the virus by the end of April, though the stock might increase, it is unlikely to see major upside, with it, in fact, likely to underperform the market and its rivals, as T-Mobile’s stock has not seen a major sell off and the benefits of the merger have been already accounted for in the current price.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

 

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