T-Mobile vs. Verizon: Who Is Better?

T-Mobile stock (NASDAQ: TMUS) is up 25% so far in 2020, whereas Verizon stock (NYSE: VZ) has seen a drop of 8% in value. If we compare the stock price trends for these telecom giants over recent years, we can see that TMUS’ stock price shot up 71% from $58 at the end of 2016 to $99 as on 28^th May 2020, which is much higher than the 22% growth in Verizon’s stock from $46 to $56 during the same period. What is perplexing is that T-Mobile’s outperformance was possible despite Verizon’s profit margins being consistently and significantly higher that T-Mobile over the last 4 years. So what’s behind T-Mobile’s superior stock performance vis-à-vis Verizon? Our dashboard T-Mobile vs. Verizon: Does The Stock Price Movement Make Sense? has the underlying numbers.

Verizon’s net income margin has ranged between 10.8% and 24.2% in the last 4 years, compared to the range of 3.9% and 11.2% for T-Mobile, signifying Verizon’s more than double margins in most years. Thus, the primary factor contributing toward TMUS’ stock price growth is the healthy rise in T-Mobile’s revenues, which have increased from $37.5 billion in 2016 to $45 billion in 2019. This is in comparison to Verizon’s revenue which grew from $126 billion to $131.9 billion during this period. Though Verizon is a much bigger company (almost 3x the size of TMUS), T-Mobile achieved a revenue growth of 20% in the last 4 years as against 4.7% for Verizon. Additionally, T-Mobile currently commands a P/E multiple of 24.4x, which is more than double Verizon’s 12x multiple.

T-Mobile and Verizon – Different Growth Aspects

Let’s have a closer look at the core business prospects. The primary war between telecom players is to grow their post-paid subscribers as they provide higher average revenue per user (ARPU) and lower churn rate. Verizon saw 1.2 million net subscriber additions in Q4 2019. Despite being a much larger company with more resources, Verizon’s subscriber addition was less than 1.3 million net additions achieved by T-Mobile in Q4 2019. The lower subscriber addition was despite Verizon’s aggressive promotion and offering Disney+ streaming service free to entice sign-ups.

With the outbreak of coronavirus pandemic in the beginning of 2020, Q1 2020 has been a difficult quarter for almost all industries, and telecom is not an exception. Verizon reported 68,000 net losses of retail post-paid phone connection during the quarter. However, this compares with a net addition of 452,000 in T-Mobile’s branded post-paid phone customers in Q1 2020. Though both companies have withdrawn their revenue and subscriber guidance for the full-year, T-Mobile completely outperformed Verizon in subscriber addition in the coronavirus-hit first quarter.

The year 2020 will be challenging for both companies due to the pandemic induced uncertainty. Both have focused their efforts and resources on expanding the 5G network in 2020. Even here T-Mobile has an edge over Verizon, due to its merger with Sprint on 1^st April 2020. The deal will help T-Mobile register healthy subscriber growth, while also providing the company access to Sprint’s key radio frequency assets which when combined with T-Mobile’s, will give it industry-leading 5G technology.

Thus, with much higher revenue growth over the years, far better Q1 2020 despite the crisis, and a positive outlook due to the merger with Sprint, and 5G expansion has helped T-Mobile command a P/E multiple of 24.4x, more than double that of Verizon’s 12x currently. As per T-Mobile valuation by Trefis, we have a price estimate of $95 per share for TMUS stock, close to its current market price of $99. In contrast, Verizon’s valuation by Trefis gives a fair price estimate of $62.

If there are no signs of abatement of the coronavirus crisis by the end of Q2 2020, both stocks could see a drop from their current level, with TMUS expected to see a lesser drop. In contrast, if there are clear signs of crisis abatement in June 2020, even then T-Mobile is likely to outperform Verizon in the post-crisis scenario.

Looking for more insights on telecom stocks? See how AT&T’s stock is performing amidst the current crisis and the launch of HBO Max in our interactive dashboard What Factors Drove -11.3% Change In AT&T Stock Price Between 2017 And Now?

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

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