AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) are two of the largest cell phone carriers in America. Both of these companies serve millions of customers and generate billions of dollars in revenue each year. From an investment perspective, however, the two are very different propositions.
AT&T is a legacy brand attempting to modernize, while T-Mobile is a young company still in its vigorous growth phase. This leaves substantial questions about which company is the better investment.
In addition to the dividend cut, 2022 was a challenging year for AT&T in terms of revenue and income. Revenue dropped 9.9 percent to $120.7 billion, while net income dropped from $25.9 billion in 2021 to ($4.6) billion in 2022. Much of this difficulty was due to the restructuring surrounding the WarnerMedia spinoff. Capital investments in 5G and other network upgrades also contributed to the reported loss.
AT&T successfully added 2.9 million postpaid phone accounts and 1.2 million fiber internet customers during the year. The company was also able to roll out its 5G infrastructure faster than expected, more than doubling the number of customers it projected to cover by the end of the year.
Although AT&T clearly has its challenges, there’s an argument to be made that the company is undervalued at today’s prices. At just 7.6 times earnings and 1 times sales, the stock is trading at a steep discount.
While this could be a value trap if the company continues to struggle, even very low forward growth rates would make the company an attractive value buy at such low prices. This potential undervaluation is reflected in the median 12-month analyst price target of $22, which would represent a 20 percent return over the most recent price of $18.33.
Arguably the biggest risk AT&T faces today is its lack of a robust moat. While the company once dominated the American telecommunications industry, the more competitive nature of the modern phone and internet business has hindered AT&T. Nevertheless, AT&T continues to attract new customers and remain relevant in this more competitive environment.
In many ways, T-Mobile is nearly the complete opposite of AT&T from an investment perspective. While investors buy and hold AT&T for value and long-term dividend income, T-Mobile is a rapidly growing up-and-comer in the telecommunications space. The company’s earnings per share are expected to rise more than 37 percent in the coming 12 months, reflecting T-Mobile’s explosive growth potential.
In 2022, T-Mobile saw its revenues grow 5 percent to reach $61.3 billion. Like AT&T, however, T-Mobile did see its net income drop last year. In T-Mobile’s case, net income fell 14 percent to $2.6 billion. This drop was smaller than AT&T’s and did not push the company’s full-year earnings into the red.
T-Mobile added a record 1.4 million postpaid accounts in 2022, alongside 338,000 prepaid accounts. The company also added 2 million accounts to its high-speed internet service, a key growth driver for T-Mobile going forward.
Over the next 3-5 years, T-Mobile is expected to see its earnings grow at a compounded annual rate of nearly 45 percent.
This rapid rate of growth sets T-Mobile apart from AT&T, which is expected to regain profitability but remain largely flat afterward. While investors would be wise to view the 45 percent projection as overly optimistic, it’s clear that T-Mobile is in an excellent position to achieve strong earnings growth over the next few years.
Due to this growth potential, T-Mobile trades at much higher multiples than AT&T does. The stock is currently priced at 21.3 times earnings and 2.2 times sales. While much higher than AT&T, these metrics are quite reasonable if T-Mobile realizes the explosive growth that is expected of it. In fact, the stock’s price-to-earnings-growth ratio of 0.7 is considered a signal of undervaluation in growth companies.
Over the next 12 months, T-Mobile could have even more upside than AT&T. The consensus fair value for the stock is $175, up more than 24 percent from the most recent price of $141.03. It’s worth noting that all 26 current price forecasts suggest that the stock will rise above its current price.
Most of T-Mobile’s self-stated risk factors involve finance and corporate affairs. In January, however, the company experienced another pressing risk within the telecom industry, namely that posed by data breaches. T-Mobile said that personal information for 37 million of its customers was accessed by a malicious actor. Such breaches can reduce public trust in telecom service providers and negatively impact new account additions.
ATT vs TMUS: Which Stock Is Best?
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