It used to be
world, but wireless now belongs
— and its stock will continue to benefit.
Verizon (ticker: VZ) was the undisputed winner of the 4G era, investing heavily in network infrastructure and wireless spectrum licenses to build the nation’s best service. Subscriber profits and premium prices were the spoils.
(T) was emphatic, allowing the administration to break out in a since-reverse invasion of the media industry. T-Mobile ( TMUS ) and Sprint lagged behind, lacking the scale to compete with bigger players, and forced to rely on cut prices to lure consumers to inferior networks.
A lot has changed as the world has moved on to 5G. Nearly 2½ years after acquiring Sprint, T-Mobile’s business is humming. The longtime wireless carrier is winning praise for its 5G network and gaining market share, helped by industry-low prices for its mobile plans. Shareholders will also benefit as T-Mobile completes its costliest integration of Sprint and prepares to direct excess cash flow toward buying back a significant portion of its stock.
Barron’s recommended buying T-Mobile stock in January 2020, and the stock has gained 84% since then, compared to a 34% return for
The stock has returned 25% this year alone—and more gains are in store.
It’s hard to overstate how much the shift to 5G has changed the competitive balance of the US wireless business. The industry is in the early stages of a transition to next-generation networks, which offer faster speeds and better performance in congested areas than previous technologies through the use of more antennas, additional higher frequency radio waves and greater network efficiency.
The move put T-Mobile in pole position. T-Mobile’s merger with Sprint, which closed in April 2020, gave the company an enviable portfolio of wireless spectrum licenses in the sweet spot for 5G. The combined company’s greater operational, network and customer scale means deeper pockets and more ammunition for capital spending on the network. T-Mobile now has over 100 million subscribers, surpassing AT&T. The mid-range network covered 235 million Americans at the end of June. And it’s committing nearly $14 billion in capital spending this year — less than its rivals but more than double its pre-merger rate.
Unlike AT&T and Verizon, T-Mobile managed to do all of this without raising prices—and continued to see growth in average revenue per user, or ARPU. That’s because customers are choosing T-Mobile’s more expensive tiers with more features, which suggests it’s attracting higher-value subscribers. It means T-Mobile can expand margins in the coming years — from about 4% this year — catching up with Verizon and AT&T, which have middle-aged margins.
Nowhere was T-Mobile’s advantage more clear than during its second-quarter earnings season. T-Mobile trounced rivals, adding an industry-leading net 1.7 million postpaid customers — a very important metric for wireless companies that refers to customers who pay a monthly bill — and beating Wall Street estimates by several basic measurements. Management has increased guidance across the board.
Verizon, meanwhile, barely met expectations, losing contract phone subscribers and cutting its guidance for the second quarter in a row. AT&T saw strong subscriber additions but weak free cash flow as it spent on promotions to drive growth. It also cut free cash flow guidance for the full year.
“T-Mobile delivered by far the cleanest quarter of the Big Three, with management continuing to execute on all fronts,” wrote Morgan Stanley’s Simon Flannery, who named T-Mobile his top pick after the reports .
Of course, much of this shift is already being reflected in stocks. While T-Mobile’s stock has held its value over the past 12 months, near $147, Verizon has fallen 21% over the past year, to around $43.50 a share—levels last seen in 2017. AT&T down 8% over the past year, to about $18. T-Mobile’s stock trades at less than 10 times enterprise value relative to next year’s Ebitda, compared to about 7.5 times for its two rivals.
Verizon and AT&T aren’t sitting still either. Both are also spending heavily on 5G, although both are at a disadvantage when it comes to spectrum licensing. They were the top bidders in last year’s C-band auction, offering a total of nearly $70 billion. This mid-band spectrum will be a key part of their 5G networks, but is just starting to become available this year and next. Meanwhile, independent analytics firms have consistently rated T-Mobile’s 5G network above that of Verizon or AT&T.
Verizon management is confident that the full launch of C-band spectrum and the added density of its higher-frequency mmWave network will close the 5G performance gap with T-Mobile. At the end of June, Verizon said it had 135 million Americans covered by C-band, growing to at least 175 million by the end of the year. “We’re on a path to a very, very strong network performance,” Verizon Chief Financial Officer Matt Ellis said on the company’s second-quarter earnings call in late July.
Others, like veteran telecom analyst Craig Moffett, aren’t so sure. “Verizon has a history of excellence in its network operations, so it’s certainly not something to dismiss out of hand,” he says. “But physics is on T-Mobile’s side.”
T-Mobile also has an attractive starting point on its side. Buoyed by the 5G lead, management is focused on growing market share in rural areas and business customers, where T-Mobile and Sprint have historically lagged behind Verizon and AT&T. There’s a long runway for subscriber growth there: Management expects T-Mobile’s share of rural and business customers to grow to 20 percent by 2025, from the low teens and high single digits, respectively.
But the biggest boost to profit growth can come from doing nothing. T-Mobile management said in July that it expects to complete the integration of Sprint’s network by the end of September — versus a previous target of late 2022. That was the costliest part of the acquisition integration, which includes moving cell sites from one network to another, closing duplication and moving former Sprint subscribers to the T-Mobile network. Merger-related costs were nearly $1.7 billion in the second quarter alone.
Once those costs are factored in, T-Mobile’s increased customer scale and rising ARPU will flow into free cash flow – paving the way for a massive share buyback program that could be announced later this year.
(DTEGY) owns 48.4% of the shares, with
(9434.Japan) holding 3%. The remaining 48.6% of T-Mobile’s market capitalization is about $90 billion, against a potential $60 billion buyback program over four years, per management guidance. This is huge. Taking back two-thirds of the stock’s spread will dramatically increase earnings per share. As a result, Wall Street analysts expect T-Mobile’s earnings to quadruple, from $2.41 in 2021 to $11.54 in 2025. Verizon’s and AT&T’s earnings per share are expected to remain essentially flat from 2021 to 2025, according to FactSet.
So forget about T-Mobile’s slight valuation premium over peers or its recent run. They barely begin to reflect its vastly superior growth trajectory and buyback plans. T-Mobile remains the best bet for telecom investors.
Write to Nicholas Jasinski at firstname.lastname@example.org