Read us and find out if T-Mobile is still a good investment idea.
TMUS is the second largest wireless provider in the U.S., offering voice, messaging, and data services to roughly 103.4 million customers
The business
We see sales growth of 16.8% in 2021 (reflecting the merger with Sprint) and 2.0% in 2022. We see growth driven by next-generation mobile devices, as well as simplified pricing plans. We positively view service revenue growth, and we see a more stable pricing landscape given greater focus on more consumer-friendly options. TMUS reported roughly 1.2 million branded postpaid net additions (best in the industry) and 151k prepaid net additions in Q1. Postpaid phone churn at 0.98% (up 12 bps), reflects strong brand loyalty. We think TMUS is well-positioned on a competitive basis given spectrum wins, appealing consumer offerings, and brand. We see EBITDA margin between 34.1% and 35.5% for 2021 and 2022, compared to 33.5% in 2020, driven by synergies from the Sprint merger, partially offset by aggressive promotional efforts and higher marketing costs. T-Mobile is turning its attention to the large enterprise and government markets, with the goal of doubling its market share, from less than 10% to nearly 20%, over the next five years. This market presents a tremendous opportunity for TMUS and is ripe for the same type of disruption that has been effective in the consumer space.
Investment Case
Our Strong Buy opinion reflects our expectation that TMUS will continue to outgrow peers. We expect competitive pressures to remain fierce, but positively view free cash flow growth potential and churn. Sprint and TMUS have finally completed their merger, 703 days after first being announced. TMUS continues to raise its merger synergy guidance and now expect synergies of $2.8 billion to $3.1 billion in 2021, which is more than double the $1.3 billion delivered in 2020. It also expects total synergies to be more than $70 billion, up more than 60% from the original merger guidance of $43 billion. We expect the T-Mobile will continue to be aggressive with plan pricing this year to capture additional market share from AT&T and Verizon. Risks to our recommendation and target price include weaker-than-expected customer growth, higher-than-expected churn and debt issuance and increased or prolonged pricing pressure would cause margins to deteriorate.
Our target of $160 applies an EV/ EBITDA multiple of 11.2x to our 2021 estimate, above peers, reflecting our view that it will continue to capture market share without sacrificing profitability
Our risk assessment is HIGH. Reflects the highly competitive nature of the wireless industry, where T-Mobile faces larger, better-capitalized companies. In addition, the company will have to maintain high capital expenditure levels to keep up with competitors' 5G network deployments.
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