Up 12% Over The Last Year, Will T-Mobile’s Mid-Band Spectrum Edge Help It Outperform In 2024?

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TMUS: T-Mobile US logo
TMUS
T-Mobile US

T-Mobile (NASDAQ:TMUS) has seen its stock gain about 12% over the past 12 months, compared to AT&T which was down 11%, and Verizon which was up 4% over the same period, as the carrier continues to see multiple tailwinds from its 2020 acquisition of rival Sprint.

Besides expanding its customer base and realizing synergies from lower operating expenses, the company also gained a considerable amount of valuable mid-band spectrum for 5G wireless technology. T-Mobile’s focus on deploying this mid-band spectrum has paid off, as it offers a solid balance between speed and coverage, compared to the millimeter-wave spectrum – which offers ultra fast speeds but weak coverage – that rivals Verizon and AT&T initially focused on.   Over Q4 2023, the most recently reported quarter, the carrier added a total of 934,000 postpaid phone customers and added 3.1 million customers during 2023, leading the industry. T-Mobile has also made steady inroads into the broadband market with its fixed wireless broadband offering, using the excess spectrum it acquired via the Sprint deal. Over the past year, the company added an industry-leading 2.1 million broadband subscribers, adding more users than incumbents such as Comcast. The company is also seeing a meaningful improvement in profitability led by the decommissioning of the legacy Sprint towers and the completion of the integration of the two networks. Free cash flow grew by about 77% year-over-year to $13.6 billion in 2023.

TMUS stock has shown strong gains of 20% from levels of $135 in early January 2021 to around $165 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in TMUS stock has been far from consistent. Returns for the stock were -14% in 2021, 21% in 2022, and 15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TMUS underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TMUS face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

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T-Mobile’s valuation on a price to earnings basis does appear rich versus its peers. The stock trades at about 18x forward earnings, which is well ahead of rivals AT&T and Verizon, which both trade at high single-digit multiples. That said, we think that the multiple is justified. While T-Mobile was traditionally known for its customer-friendly policies and value pricing, with the deployment of 5G the company has also emerged as one of the best networks. This should enable the company to grow at a quicker pace compared to rivals AT&T and Verizon, with the potential for margin improvement via the closure of the Sprint network. Moreover, free cash flows are projected to grow by about 22% at the mid-point in 2024, meaning that the stock trades at under 12x adjusted forward free cash flows. T-Mobile has also been bolstering its shareholder returns. Last year, the company made share repurchases to the tune of $13.2 billion and initiated its first quarterly dividend payment and this could also help the stock find favor with value investors. We value T-Mobile at about $176 per share, which is about 10% 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.

 Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 TMUS Return 2% 17% 190%
 S&P 500 Return 5% 32% 127%
 Trefis Reinforced Value Portfolio 3% 41% 625%

[1] Returns as of 2/26/2024
[2] Cumulative total returns since the end of 2016

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