5G Effect: Is T-Mobile Stock A Good Bet At $130?

TMUS: T-Mobile US logo
T-Mobile US

Despite an impressive rise of 77% from its March 2020 lows, at the current price of $131 per share, T-Mobile U.S. stock (NASDAQ: TMUS) still looks undervalued. The stock rallied from $74 to $131 off its recent bottom. This rally was driven by expectations of faster growth in subscribers and revenue after the completion of the merger with Sprint Corporation. T-Mobile not only survived during the coronavirus pandemic, but it thrived. T-Mobile added 5.6 million postpaid customers in 2020, the most it has added in a single year, with total revenues having increased over 50% y-o-y. Also, its recent deal with Brookings Municipal Utilities (BMU) to acquire BMU’s Sprint-branded wireless assets will help TMUS widen its customer base even further. Thus, we believe that though the stock currently is more than double its December 2018 level, it still has an upside of more than 10% driven by continued healthy growth in subscribers, revenue, and earnings. Our dashboard T-Mobile US (TMUS) Stock Has Gained 108% Between 2018-End And Now has the key numbers behind our thinking.

Some of the stock price rise between 2018 and 2020 is justified by the 58% growth in revenues. T-Mobile revenues increased from $43.3 billion in 2018 to $68.4 billion in 2019, driven mainly by the merger with Sprint Mobile and growth in post-paid revenues. This was offset by a 33% decrease in profitability as the net income margin declined from 6.7% in 2018 to 4.5% in 2020. Margins, in fact, went up in 2019 due to operating cost efficiencies and lower interest expense but declined in 2020 due to merger-related costs. On a per share basis, earnings decreased from $3.40 in 2018 to $2.68 in 2020.

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The P/E multiple shot up during this time from 19x in 2018 to 50x at the end of 2020. The rise in the multiple reflects the sharp growth in the stock price after the deal with Sprint. Additionally, expectations of continued growth in subscribers has kept the multiple close to 50x even at the moment. We believe that more partnerships in the pipeline and the company’s focus on expansion of its 5G network will take the multiple even higher to reach closer to 55x.

Where is the stock headed?

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 broader 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. This was reflected in the FY2020 results. The company added 5.6 million postpaid customers in 2020, the most it ever has added in a single year, while T-Mobile’s 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.

Any further 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 Israel. After beating market expectations for FY2020, the company is expected to continue on its healthy growth trajectory with another $14 billion revenue addition expected during the next two years. This would take the cumulative revenue addition for 2020, 2021, and 2022 (three years) to $37.5 billion, most of which is reflecting the impact of the merger and the expected subscriber additions with 5G expansion. The deal with Sprint 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. T-Mobile’s 5G network already covers 1.6 million square miles of the U.S., more than double its next closest competitor, AT&T. T-Mobile plans to extend that network to smaller markets and rural areas, thus aiming to raise that share close to 20% in the next five years, from its level of share which is in the low teens currently. A sharp rise in revenue over the next few quarters is likely to offset the near-term drop in margins due to spending on 5G expansion, thus providing further upside to TMUS stock. As per Trefis, TMUS valuation works out to $145 per share, reflecting an upside of more than 10% from its current price.


5G wireless technology is a hot trend. Which stocks should you pick? Check out our theme on 5G Stocks for details.

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