Here’s Why T-Mobile Stock Will See More Appreciation

Despite an impressive rise of 67% in the last one year, at the current price of $132 per share, we believe T-Mobile stock (NASDAQ: TMUS) is still undervalued. The stock has, in fact, gone up 76% from its March lows of 2020. It has rallied from $75 to $132 off the recent bottom, more than the S&P 500 which is up over 65% from its recent lows. The stock has been able to outperform the broader market following the completion of the merger with Sprint Corporation.

The stock currently is 105% 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 solid rise, we believe that the company’s stock still has a modest upside and will likely touch the $145 level, driven by the outlook for healthy revenue growth and expansion of 5G technology. T-Mobile added 5.5 million postpaid customers in 2020, the most it has added ever in a year. Also, its recent deal with Brookings Municipal Utilities (BMU) to acquire BMU’s Sprint-branded wireless assets will help TMUS expand its customer base further in 2021. Our dashboard T-Mobile US (TMUS) Stock Has Gained 105% Between 2017-End And Now 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 a 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 in 2020 and currently stands close to 32x, 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.

Upside Trigger?

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, was in contrast to 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 Q3 2020 results of the company, which saw T-Mobile revenues jump by 74% y-o-y. On top of this, the company’s management recently announced that it added 1.6 million postpaid customers in Q4 2020 and 5.5 million in full year 2020, the most the company has ever added in a span of a single year. T-Mobile’s customer base now stands at more than 100 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 results in the first nine months of 2020 despite the crisis, a positive outlook due to the merger with Sprint, and 5G expansion has helped T-Mobile see solid growth in its stock price. The company is expected to cumulatively add close to $35 billion to its revenue base in 2020 and 2021 (growth of 75%-80% 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 over recent months. As per T-Mobile valuation by Trefis, we have a price estimate of $145 for TMUS stock, reflecting a further upside of 10% from its current levels.

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