Verizon
Communications was the
undisputed winner of the 4G era, but the 5G age increasingly belongs to T-Mobile
US—and its stock will continue to benefit. I wrote up the case
for the shares in Barron's.
More than a decade ago, Verizon invested
heavily in its network infrastructure and wireless spectrum licenses to build
the nation’s best 4G service. Subscriber gains and premium pricing were the
spoils. AT&T was hot on its heels, allowing
management to splurge on a since-reversed foray into the media industry.
T-Mobile and Sprint were laggards, without the
scale to compete with bigger players, and forced to rely on discounted pricing
to attract consumers to subpar networks.
A lot has changed as the world has moved on to
5G. Nearly 2½ years removed from its acquisition of Sprint, T-Mobile’s business
is humming. The once-upstart wireless carrier is winning plaudits for its 5G
network and gaining market share, helped by industry-low pricing for its mobile
plans. Shareholders will benefit, too, as T-Mobile finishes the most costly
stretch of its Sprint integration and gets ready to direct surplus cash flow
toward buying back a significant portion of its shares.
It’s difficult to overstate how much the shift
to 5G has changed the competitive balance of the U.S. wireless
business. T-Mobile’s merger with Sprint, which closed in April 2020, has
given the company an enviable portfolio of wireless-spectrum licenses in the
sweet spot for 5G. The greater operational, network, and customer-base scale of
the merged company means deeper pockets and more ammo for capital expenditures
in the network.
Unlike AT&T and Verizon, T-Mobile has
managed to do all this without raising prices—and it has continued to see
growth in average revenue per user, or ARPU. That’s a function of customers
choosing T-Mobile’s pricier tiers with more features, suggesting it’s
attracting higher-value subscribers. It means T-Mobile can expand profit
margins in coming years.
Nowhere was T-Mobile’s advantage more clear
than during second-quarter earnings season. T-Mobile trounced its rivals,
adding an industry-leading net 1.7 million postpaid customers—an all-important
metric for wireless companies that refers to customers who pay a monthly
bill—and beating Wall Street estimates on several key metrics. Management
raised guidance across the board.
Verizon, meanwhile, barely matched
expectations, lost postpaid phone subscribers, and cut 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 full-year
free cash flow guidance.
The biggest boost to T-Mobile's earnings per
share might come from simply doing nothing. T-Mobile management said in July
that they expect to be done with the Sprint network integration by the end of
September—versus a previous goal of the end of 2022. That has been the
costliest portion of the acquisition integration, involving shifting cell sites
from one network to the other, shutting down duplicative ones, and
transitioning former Sprint subscribers to the T-Mobile network. Merger-related
costs were almost $1.7 billion in the second quarter alone.
Once those costs are in the rearview mirror,
T-Mobile’s increased customer scale and rising ARPU will flow through to free
cash flow—opening the way for a massive share-buyback program that could be
announced later this year and retire some two-thirds of the stock’s float over
four years.
Wall Street analysts expect T-Mobile’s
earnings to grow fourfold, from $2.41 in 2021 to $11.54 in 2025. Verizon’s and
AT&T’s earnings per share are expected to be essentially flat from 2021
through 2025, according to FactSet.
Read the rest of my T-Mobile stock pick. And find another way to play the stock via shares of its largest stakeholder Deutsche Telekom.
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