Is T-Mobile Stock Undervalued Even After 2x Jump In Value?

Despite almost doubling from its March 2020 lows, at the current price of $145 per share, T-Mobile U.S. stock (NASDAQ: TMUS) still appears to be undervalued. The stock rallied from $74 to $145 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, in fact, saw one of its best years. 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 almost 130% above its December 2017 level, it still has an upside of close to 10% driven by continued healthy growth in subscribers, revenue, and earnings. Our dashboard T-Mobile US (TMUS) Stock Has Gained 129% Between 2017-End And Now has the key numbers behind our thinking.

Some of the stock price rise between 2017 and 2020 is justified by the 68% growth in revenues. T-Mobile revenues increased from $40.6 billion in 2017 to $68.4 billion in 2020, driven mainly by the merger with Sprint Mobile and growth in post-paid revenues. This was offset by a 60% decrease in profitability as the net income margin declined from 11.2% in 2017 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 $5.39 in 2017 to $2.68 in 2020.

The P/E multiple shot up during this time from 12x in 2017 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 54x 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.

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 badly hit as the broader market during this crisis. For TMUS, 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. The impressive performance continued in 2021, with the company reporting revenues of $19.8 billion in Q1 2021. TMUS added 260,000 net new postpaid accounts and 773,000 postpaid lines during the quarter. The new account adds were twice as much as the previous quarter. T-Mobile’s customer base now stands at more than 103 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 and Q1 2021, the company is expected to continue on its healthy growth trajectory with another $14 billion revenue addition expected during the next two years. 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 of close to 10% to TMUS stock.

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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