With Big Spending Out Of The Way, T-Mobile Stock Looks Attractive

TMUS: T-Mobile US logo
T-Mobile US

T-Mobile stock (NASDAQ:TMUS) has had a stellar year so far, rising by 22% year-to-date, compared to the broader S&P which remains down by about 20% over the same period.  T-Mobile has also fared much better than rivals such as Verizon (down 21% year-to-date) and AT&T (down 10% year-to-date). Much of the momentum T-Mobile is witnessing is being led by its industry-leading 5G network which is helping it to win over more customers and raise prices. For perspective, over Q2 2022, the company added 723,000 postpaid phone subscribers, while Verizon’s net additions stood at just 12,000. Now although AT&T added a stronger 813,000 subscribers, it came at the expense of considerable promotions, which are apparently impacting its bottom line and subscriber quality. T-Mobile’s wireless churn edged lower than Verizon’s for the first time ever, indicating that customers are increasingly loyal to its network which offers a wider coverage and better download and upload speeds versus rivals. The carrier also raised its outlook for 2022 postpaid adds, projecting between 6.0 million and 6.3 million net adds, up from 5.3 to 5.8 million. T-Mobile is also making a dent in the broadband space, with its fixed wireless broadband offering adding an industry-leading 560,000 new broadband subscribers over the last quarter, compared to cable behemoth Comcast which added no net subscribers.

Now T-Mobile stock does appear a bit expensive, trading at about 22x consensus 2023 earnings, compared to Verizon and AT&T which trade at single-digit multiples. While earnings in recent quarters have been impacted by a costly integration of Sprint’s wireless network with T-Mobile’s following their 2020 merger, T-Mobile will benefit meaningfully as synergies from the deal are realized. The decommissioning of Sprint’s legacy network, which is likely to be largely complete by the end of Q3, as well as selling and general expense savings, are expected to help the company realize merger synergies of $5.4 billion to $5.6 billion by the end of this year. This should also help cash flows pick up meaningfully. T-Mobile previously guided for a free cash flow of between $13 billion to $14 billion in 2023, up from levels of about $6 billion in 2021, while noting that the number could touch $18 billion in 2026. The rising cash flows are expected to help fund significant share buybacks, possibly totaling as much as $60 billion between 2023 to 2025 per T-Mobile, and this could also support T-Mobile’s stock price.

We value T-Mobile at about $161 per share, which is about 13% ahead of the current market price. See our analysis on T-Mobile valuation: Expensive or Cheap for more details on what’s driving our price estimate for the company. Also, check out our analysis of T-Mobile revenue for more details on the company’s key business segments and how revenues are likely to trend.

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 Returns Sep 2022
MTD [1]
YTD [1]
Total [2]
 TMUS Return -1% 22% 150%
 S&P 500 Return -1% -18% 75%
 Trefis Multi-Strategy Portfolio -2% -17% 228%

[1] Month-to-date and year-to-date as of 9/5/2022
[2] Cumulative total returns since the end of 2016

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