T-Mobile’s Subscriber Growth Is Set To Cool, But The Stock Still Looks Attractive

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T-Mobile US

T-Mobile stock (NASDAQ:TMUS) posted a somewhat mixed set of Q4 FY’22 results last week. Earnings beat estimates, coming in at $1.18 per share, versus $0.34 per share in Q4 2021. Although services revenues grew by about 4% versus the prior year to $15.5 billion, driven by continued growth in the postpaid phone and broadband business, overall revenues declined slightly to $20.27 billion, due to weaker equipment sales. However, the company continued to lead the wireless industry in terms of net additions of postpaid phone lines, which are viewed as the most lucrative and sticky segment of the market, adding a net of 927,000 subscribers in Q4 2022. Full-year adds stood at 3.1 million, making it the only operator to grow year-over-year. In comparison, AT&T added 656,000 postpaid phone customers, while Verizon added 217,000 customers. T-Mobile’s fixed wireless broadband offering also continued to gain traction, with net customer additions standing at 524,000 in Q4 2022 and 2 million in 2022, the highest in the industry.

Now, T-Mobile’s subscriber growth is poised to cool over 2023. The company also said it expects overall postpaid net customer additions to come in at between 5 million and 5.5 million for the year, after adding 6.4 million customers in 2022. That said, we are likely to see meaningful improvements in the company’s bottom line this year. The costly integration of Sprint’s wireless network with T-Mobile’s following their 2020 merger is largely complete following the decommissioning of Sprint’s legacy network in Q3 2022. We are likely to see considerable merger synergies this year (between $7.2 to $7.5 billion for 2023) and this could help to boost earnings. For perspective consensus adjusted EPS for 2023 is about 3x the 2022 number.

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However, T-Mobile continues to trade at a rich valuation versus its peers – about 21x consensus 2023 earnings, compared to Verizon and AT&T who trade at 9x and 8x forward earnings, respectively. However, we think this is justified by the company’s potential to grow earnings and its rising cash flows. T-Mobile has guided Free Cash Flow, including payments for Merger-related costs, at between $13.1 billion and $13.6 billion, up approximately 75% year-over-year at the mid-point. The rising cash flows are expected to help fund significant share buybacks, which, in turn, could support the company’s earnings per share and stock price. We value T-Mobile at about $161 per share, which is about 11% 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 Feb 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 TMUS Return -5% 1% 150%
 S&P 500 Return 1% 7% 84%
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[1] Month-to-date and year-to-date as of 2/7/2023
[2] Cumulative total returns since the end of 2016

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