Despite a 39% rise since the March 20 lows of this year, at the current price of around $104 per share, we believe T-Mobile’s stock (NASDAQ: TMUS) has more upside left. TMUS stock has increased from $75 to $104 off the recent bottom, similar to the S&P which also increased by around 39%. The stock has recovered in tandem to the broader market. The rise in stock price was mainly driven by the merger with Sprint Corporation to create the third largest telecom giant in the world.
The stock currently is 64% above the levels at which it was at the end of 2017 and it has already surpassed the pre-covid (February 2020) high of $100. Despite such a healthy rise, we believe that the company’s stock still has a modest upside, driven by outlook for healthy revenue growth and expansion of 5G technology. Our dashboard What Factors Drove 64% Change In T-Mobile US Stock Between 2017 And Now? has the underlying numbers.
Some of the stock price rise in the 2017-2019 period is justified by the 10.8% growth in revenues. T-Mobile’s revenues increased from $40.6 billion in 2017 to $45 billion in 2019, mainly driven by growth in post-paid revenues. This was offset by a 31% decrease in profitability as net income margin declined from 11.2% in 2017 to 7.7% in 2019. This decline was mainly because of margins being unusually high in 2017 due to one-time tax benefits received. After declining in 2018 (due to base effect), margins, in fact, went up in 2019 due to operating cost efficiencies and lower interest expense. On a per share basis, earnings decreased from $5.39 in 2017 to $4.06 in 2019.
Stock price increased during this period as margins and revenue grew (and as 2018 margin decline was due to high base in 2017), which led to an increase in P/E multiple from 12x in 2017 to 19x in 2019. The multiple shot up further this year and currently stands at 26x, as the stock price increased with the market giving a thumbs up to the deal with Sprint. We believe the P/E multiple could go further up in the near term providing an upside to the stock.
What’s The Likely Trigger & Timing For Further Upside?
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 $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, and the merger being completed in April 2020, completely trounced the general bearish sentiment in the market. 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. T-Mobile registered better than expected Q1 results, with a net addition of 452,000 in T-Mobile’s branded post-paid phone customers.
In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.
Thus, with healthy revenue growth over the years, better than expected Q1 2020 despite the crisis, a positive outlook due to the merger with Sprint, and 5G expansion has helped T-Mobile expand its P/E multiple to 26x currently. The company is expected to add close to $35 billion to its revenue base in 2020 and 2021 (growth of 75%-80% compared to 2019) due to the merger. With this trend of high revenue growth expected to begin from the results of Q2 2020 (due in July-August) and with investors’ focus shifting to 2021, the P/E multiple could rise further, leading to a rise in the stock price. As per T-Mobile valuation by Trefis, TMUS’ fair price estimate comes to $110.
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