Buy Or Sell T-Mobile Stock?

Even after a formidable rise of close to 70% from its March 2020 lows, at the current price of $125 per share, we believe T-Mobile stock (NASDAQ: TMUS) is still a good opportunity for investors. TMUS stock has rallied from $74 to $125 off its recent bottom, almost a similar rise compared to the S&P 500. This healthy rally was driven by expectations of faster growth in subscribers and revenue after the completion of the merger with Sprint Corporation. The stock fell 5% last week after declaring its full year 2020 results. Though the company managed to beat all estimates for the year, the guidance for 2021 fell slightly short of what Wall Street was expecting. Despite this, we believe that the company will still be in a position to add close to $11 billion in revenue in 2021 alone, along with significant improvement in margins.

T-Mobile added 5.6 million postpaid customers in 2020, the most it has added in a single year. Also, its recent deal with Brookings Municipal Utilities (BMU) to acquire BMU’s Sprint-branded wireless assets will help TMUS widen its customer base. Though the stock is currently trading at 2x its level in 2017, we believe continued healthy growth in subscribers, revenue, and earnings provides TMUS stock with a potential upside of more than 15%. Our dashboard Why T-Mobile Stock Gained 97% 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, 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 31x, 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.

Outlook

The global spread of coronavirus led to lockdown in various cities across the globe, which affected economic activity. However, T-Mobile was not as affected as the market during this crisis.  For the company, the approval given by the district judge to the T-Mobile and Sprint merger, and the merger being completed in April 2020, was able to offset 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 recently released FY2020 results. The company added 5.6 million postpaid customers in 2020, the most it ever has added in a single year, while total revenues also increased over 50% y-o-y. 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. After beating market expectations for FY2020, the company is expected to continue on its healthy growth trajectory with another $11 billion revenue addition expected during the year. This would take the cumulative revenue addition for 2020 and 2021 to $35 billion. This would be driven by the Sprint merger, the recent BMU deal, and 5G expansion plans. 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 the last one year. As per T-Mobile valuation by Trefis, we have a price estimate of $145 for TMUS stock, reflecting a further upside of 15% from its current levels.

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