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T-Mobile: Oligopoly Leader, but be Wary of Valuation
Stock Analysis & Ideas

T-Mobile: Oligopoly Leader, but be Wary of Valuation

T-Mobile US (TMUS), together with its subsidiaries, provides mobile communications services in the United States, Puerto Rico, and the United States Virgin Islands.

Through its Un-carrier marketing strategy, T-Mobile has disrupted the wireless communications services industry by actively engaging with and listening to its customers, while eliminating their existing pain points. This includes providing them with added value and an exceptional experience. I am neutral on TMUS. (See Analysts’ Top Stocks on TipRanks)

The company is cherished among its mobile users for ending annual service contracts, overages, unpredictable international roaming fees, data buckets, amongst other inconveniences.

In addition, T-Mobile’s Un-carrier vision was boosted by the completion of the company’s merger with Sprint in April of last year, which concluded with Sprint and its subsidiaries becoming wholly owned consolidated subsidiaries of the parent T-Mobile.

Through the merger, the company acquired Sprint’s customers and its 2.5 GHz mid-band spectrum, among other assets. This should allow for increased efficiencies and higher economies of scale.

Synergies to Grow Profitability

T-Mobile’s competitive pricing plans have historically resulted in weak operating margins, which are lower than those AT&T (T) and (VZ) enjoy. Specifically, T-Mobile’s operating margin over the past four quarters stands at around 13.1% versus 17.4% and 25.8% for AT&T and Verizon, respectively.

It’s true that the two latter companies benefit from their higher-margin Media segments in that regard, but still, the case remains.

Powered by the merger with Sprint, T-Mobile should unlock multiple synergies, which will in turn help margins expand higher. This should translate to higher free cash flows going forward, which can be utilized to reinvest in the business or grow shareholder returns.

Specifically, the company remains very optimistic about its synergies potential, estimating $13 billion to $14 billion in free cash flow for 2023, and $18 billion or more annually in 2026. These free cash flow levels imply significantly higher profitability levels, which should translate into higher capital returns, that the company now lacks.

Is the Stock Expensive?

While TMUS shares have recently declined, the stock remains elevated from its last year’s price levels. With an expected EPS for the year at $2.36, the stock is trading with a forward P/E of around 49.4, which is a heavy premium for the industry.

However, EPS is also expected to expand rapidly in line with management’s free cash flow expansion outlook. EPS is expected to grow up to $5.47 by 2023, likely justifying the current premium.

Still, the stock is not cheap. If T-Mobile misses on its estimates, TMUS could undergo a significant valuation multiple compression.

Wall Street’s Take

Turning to Wall Street, T-Mobile has a Strong Buy consensus rating. This is based on 15 Buys, two Holds, and one Sell assigned in the past three months. At $169.36, the average T-Mobile US price target implies 45.4% upside potential.

Conclusion

T-Mobile operates the biggest and fastest 5G network, following the acquisition of Sprint. The network is currently four times larger than Verizon’s and two times larger than AT&T’s.

The company is anticipated to pave the way in 5G in the medium term. Still, the valuation gives reason for caution.

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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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