The outlook for T-Mobile stock boils down to execution issues. With the Sprint merger done, will T-Mobile US (TMUS) smoothly integrate the two wireless networks, thereby cutting costs? The other issue for TMUS stock: will management capitalize on a 5G wireless spectrum advantage vs. AT&T (T) and Verizon Communications (VZ)?
Controlled by Deutsche Telekom (DTEGY), T-Mobile stock continues to lead the industry in subscriber and revenue growth. Deutsche Telekom is poised to increase its stake in T-Mobile to over 50% from 44%. Some options run through June 2024.
What mechanism Deutsche Telekom uses to increase its stake to over 50% could impact a planned TMUS stock buyback by T-Mobile. The German telecom company could buy shares from former T-Mobile-parent SoftBank or not.
T-Mobile stock reported March-quarter earnings, revenue and postpaid wireless phone subscribers that topped analyst estimates roughly a year after the industry-changing Sprint merger closed.
TMUS Stock: Network Quality Improving
“TMUS stock is executing very well and is ahead of its competition on network builds,” Oppenheimer analyst Tim Horan said in a report to clients. “It delivered leading postpaid phone net additions even though more Sprint customer traffic migrated to its network. Home broadband and enterprise are still in early days but represent upside to service revenue. Network quality is improving, which we expect will continue.”
At its investor day March 11, T-Mobile said it expects free cash flow growth to support a $60 billion stock buyback from 2023 to 2025. Management said it’s targeting free cash flow of $13 billion to $14 billion in 2023 and $18 billion in 2026 for TMUS stock.
For 2021, T-Mobile said it expects to add in a range of 4 million to 4.7 million postpaid subscribers — once again likely to lead the industry.
But T-Mobile’s operating margins lag Verizon and AT&T.
T-Mobile Stock: Sprint Merger Provides 5G Spectrum Edge
In addition, 2021 is expected to be a peak investment year as T-Mobile invests in a 5G network, customer acquisition and Sprint merger integration.
In a cost-cutting move, though, T-Mobile in late March shut down its TVision pay-TV service. T-Mobile replaced the TVision service with YouTube TV. And, TMUS stock announced deeper marketing ties with Alphabet‘s (GOOGL) Google.
With the acquisition of Sprint, the new T-Mobile owns more mid-band radio spectrum than AT&T or Verizon. That could provide an important edge as 5G wireless services are rolled out. Mid-band airwaves provide much faster 5G data speeds with better coverage than low-band spectrum.
T-Mobile spent $9.3 billion in a recent government auction of 5G wireless spectrum, despite its already sizable holdings of mid-band airwaves.
At the end of 2020, T-Mobile’s 5G network using 2.5-gigahertz spectrum reached 106 million people in the U.S. That will double to more than 200 million people by the end of 2021, T-Mobile says. In 2022, the mobile 5G network will reach 250 million people, the company forecast.
T-Mobile also plans to launch 5G fixed broadband services to residential customers. It’s targeting 7 million to 8 million customers by 2025.
With the merger closed, one goal is reducing customer turnover at Sprint. The key to that is improving service quality by shifting Sprint subscribers to T-Mobile’s network, analysts say.
TMUS Stock: Network Integration Key
T-Mobile and Sprint forecast that some $6 billion in back-office cost savings would result from combining billing operations and information technology departments. The companies also plan to combine wireless networks, cellphone towers and retail locations.
Still, T-Mobile will need to make investments to integrate networks and radio spectrum bands.
In the March quarter, T-Mobile said adjusted earnings fell 33% from a year earlier to 74 cents per share as a jump in outstanding shares tied to the Sprint merger reduced profits.
T-Mobile said revenue rose 78% to $19.76 billion, boosted by its merger with Sprint. Pro forma revenue for the combined company rose 13.5% to 19.76 billion. The company did not provide a year-over-year revenue growth comparison for the combined entity.
Analysts expected T-Mobile to report adjusted earnings of 57 cents a share on revenue of $18.9 billion. T-Mobile said it added 773,000 postpaid phone subscribers vs. 452,000 a year earlier. Analysts had estimated 497,000 postpaid phone subscriber additions.
Earnings before interest, taxes, depreciation and amortization, also known as EBITDA, rose 2% to $6.9 billion from the December quarter. Analysts estimated adjusted EBITDA of $5.59 billion.
In 2020, Sprint merger synergies totaled $1.3 billion. T-Mobile forecast 2021 merger synergies in a range of $2.7 billion to $3 billion. At the end of March, roughly 20% of former Sprint customers had migrated to the T-Mobile network.
T-Mobile Stock: Will 5G Wireless Boost Revenue?
T-Mobile’s guidance for 2021 EBITDA in a range of $26.5 billion to $27 billion missed consensus estimates of $27.9 billion. However, some analysts called the EBITDA guidance conservative.
In addition, TMUS stock has come a long way since U.S. regulators blocked AT&T’s proposed acquisition of T-Mobile in 2011. A rejuvenated T-Mobile in late 2013 unleashed its “Uncarrier”-branded marketing campaign along with aggressive price discounts.
Also, T-Mobile upgraded its wireless network, closing a performance gap with Verizon. The strategy paid off as T-Mobile grabbed the lion’s share of coveted “postpaid” subscribers that spend more on wireless data services.
However, growth has cooled since 2017 for all U.S. wireless companies. The big question is whether 5G wireless networks will create new revenue streams.
5G wireless networks will provide faster data speeds to consumer devices. Two-hour movies will be downloaded in 5 seconds vs. 6 minutes on a 4G network. Even so, the growth of some 5G stocks depends on the emergence of new consumer smartphone apps.
Like Verizon, T-Mobile plans to challenge cable TV companies with fixed 5G broadband services to homes.
T-Mobile has told analysts that it expects to capture 9 million to 10 million fixed wireless 5G homes by around 2026.
On the enterprise side, private 5G network services are expected to drive new business uses. The future of 5G wireless lies in the industrial Internet of Things, remote health care, drones and robotics, autonomous driving, and smart factories.
Is TMUS Stock A Buy Right Now?
T-Mobile stock owns a IBD Relative Strength Rating of 59 out of a best-possible 99, according to IBD Stock Checkup. That means it has outperformed 59% of all other stocks. The best stocks tend to have an RS Rating of at least 80.
T-Mobile stock has an Accumulation/Distribution Rating of C. That rating analyzes price and volume changes in a stock during the prior 13 weeks of trading. The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of a C grade as neutral.
Shares climbed on T-Mobile’s March quarter financial results and 2021 outlook. As of May 25, T-Mobile stock trades within a 5% buy zone rose above its flat-base 135.64 entry point. The 5% buy zone extends to 142.42, according to IBD MarketSmith analysis.
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Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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