Last year was a stellar year for telecom giant T-Mobile US, Inc. (NASDAQ:TMUS) on the basis of its 5G growth. But, recently, its stock has seen some declines, and started the year with a downgrade. Still, the company’s reach is unquestionable and its ability to elbow out prime competitors has been a real feat worthy of a business case study.
Over the past year, T-Mobile’s stock gained close to 30%, which is slightly better than what its competitor AT&T Inc. (NYSE:T) posted and significantly better than how Verizon Communications Inc. (NYSE:VZ) has performed over the same period.
On the other hand, over the past month, T-Mobile’s stock has declined close to 10%. So, the start of the year has not been as favorable as shareholders may have hoped. Is there a strong rebound coming, and should investors capitalize on this downturn?
T-Mobile US Is The Largest Telecom Provide By Size
T-Mobile was formed after a rebrand when Deutsche Telekom purchased Voicestream Wireless and renamed it T-Mobile USA, Inc. Since then, the company has grown its presence to become one of the largest telecom mobile carriers in the U.S. It is also the largest telecom provider in the country by market capitalization.
Acquisitions have also been the name of the game for the company and its top line growth was aided by a slew of mergers and acquisitions. The biggest of them came in 2020 when it completed a merger with Sprint Corporation. In the process, a substantially larger conglomerate was born, resulting in a supercharged 5G service provider.
This also created a shift in the U.S. network service provider market because T-Mobile acquired Sprint’s 33.84 million post-paid subscribers on top of the 47 million subscribers it already had.
As in the case of a consolidation, the market landscape became much more competitive than it had been previously. The purchase has also paid off as evidenced by T-Mobile’s industry-leading customer net additions.
According to data from Tracxn, T-Mobile made 10 acquisitions in total, averaging at least one in each of the past three years.
The last purchase was to acquire Ka’ena Corporation. This deal included the purchase of direct-to-consumer (D2C) prepaid wireless brands Mint Mobile, internationally-focused value brand Ultra Mobile, and wholesale wireless solutions provider Plum.
The company is also gunning to acquire digital-out-of-home advertisements tech solutions provider Vistar Media. The ad tech platform is likely to be a seamless addition to the company’s portfolio, especially because, as one of the largest connectivity providers, it can serve marketers with insights.
The acquisitive spree was going well and the company’s stock was seeing some hefty gains when it was downgraded by two notable analyst firms. Wells Fargo and RBC Capital’s analysts downgraded the stock.
Wells Fargo downgraded the stock from “overweight” to “equal weight” and lowered the price target from $240 per share to $220 per share. RBC Capital downgraded the stock from “outperform” to “sector perform” and lowered the price target from $255 to $240.
Wells Fargo gave the verdict that while the company continues to outperform its competitors, it is turning into a mature business, so its growth is likely to slow down over time. The analyst firm also anticipated the gradual phasing out of the unprecedented boost it received from the Sprint merger synergies.
Low Churn and High Growth Boosting Financials
In its third quarterly results for fiscal 2024, management reported the best in the industry for postpaid net account additions and net customer additions.
Postpaid phone net customer additions also eclipsed those of its competitors, and were the highest in the history of the company’s Q3 results.
Another tailwind for the bulls is that churn is extremely low of 0.86%, also a record low for the company’s Q3 results. T-Mobile also added 415 thousand high-speed internet net customer additions, which was the best in its industry. Although not all operational metrics beat the year prior’s figures, the numbers were broadly impressive.
Turning to the financials, total revenues increased by 4.7% year-over-year to $20.16 billion, primarily driven by an 8.3% jump in its postpaid service revenue to $13.31 billion.
In addition, T-Mobile is managing costs very well as evident in the bottom line growing at a higher rate than the top line. Net income went up by 42.8% from the year-ago value to $3.06 billion. The company earned $5.16 billion in adjusted free cash flow, which was a 29% jump from the prior year’s period. T-Mobile returned cash through stock repurchases and cash dividends.
Will T-Mobile Stock Recover?
Cost cutting measures have boosted profitability and should support T-Mobile stock recovering as evidenced by analysts consensus forecast for the share price to rise by 21% to fair value of $135 per share.
Trading at just 18.9x earnings and with a 4.6% dividend yield, there is lots to like for both value and income investors at the moment.
T-Mobile management was optimistic about the firm’s prospects and chose to raise the postpaid net customer additions forecast for 2024. Yet, a turnaround to the highs might take some time, unfortunately. The price is sitting at 22.85x its forward earnings, which is higher than what the industry has at the moment.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
