Despite an impressive 55% rise since its March lows of this year, at the current price of $116 per share, we believe T-Mobile stock (NASDAQ: TMUS) still has some upside left. TMUS stock went up from $75 to $116 off the recent bottom, slightly more than the S&P which increased by around 54%. The stock has been able to outperform the broader market following the completion of the merger with Sprint Corporation to create the third largest telecom giant in the world. The stock currently is 83% 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 and will likely breach the $120 level, driven by the outlook for healthy revenue growth and expansion of 5G technology. Our dashboard Buy Or Sell T-Mobile US Stock? has the key numbers behind our thinking.
Some of the stock price rise between 2017 and 2019 is justified by the 10.8% growth in revenues. T-Mobile 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 on account of the Tax Cuts & Jobs (TCJ) Act. 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.
The stock price increased during this period as margins and revenue grew (and as 2018 margin decline was due to high base in 2017 and not due to any change in fundamentals), which led to an increase in the P/E multiple from 12x in 2017 to 19x in 2019. The multiple shot up further this year and currently stands close to 29x, as the stock price increased with the market giving a thumbs up to the deal with Sprint and TMUS’ 5G expansion plans. We believe the P/E multiple could go up further in the near term providing an upside to the stock.
The global spread of coronavirus led to lockdown in various cities across the globe, which affected economic activity. However, T-Mobile did not face as much heat as the market during this crisis. For the company, the jubilance provided by the approval given by the district judge to the T-Mobile and Sprint merger, and the merger being completed in April 2020, flogged the general bearish sentiment in the market. The deal is helping 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. This was reflected in the Q2 2020 results of the company, which saw T-Mobile’s revenues jump by 59% y-o-y. TMUS added more than 1.2 million net new customers in Q2, which includes 1.1 million postpaid subscribers, who are generally the most profitable and sought-after wireless customers. T-Mobile’s customer base now stands at 98.3 million, which puts it ahead of AT&T and makes it the second largest telecom player, just behind Verizon.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With healthy revenue growth over the years, better than expected Q1 and Q2 2020 results despite the crisis, a positive outlook due to the merger with Sprint, and 5G expansion has helped T-Mobile see healthy growth in its stock price. The company is expected to cumulatively add close to $32 billion to its revenue base in 2020 and 2021 (growth of 70%-75% compared to 2019) due to the merger. A sharp rise in revenue is likely to offset the near-term drop in margins due to spending on 5G expansion, thus providing further upside to TMUS stock despite such a healthy recovery in the last 7 months. As per T-Mobile valuation, Trefis has a price estimate of $121 per share for TMUS stock, reflecting an upside of about 5% from its current level.
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