Financial thesis
The top pure-play provider of mobile internet services is T-Mobile (NASDAQ:TMUS). The company has had significant core EBITDA growth, and the expenses involved with its merger with Sprint are going down. I think T-Mobile will give stockholders a lot of free cash flow.
T-Mobile, in my opinion, is a fantastic long-term investment in the transition to 5G. The business is also driving a significant transition away from established internet businesses. This, along with their comparatively low valuation, makes me optimistic about the business.
Strong Direction and Growth Strategies
The most recent quarterly earnings for T-Mobile were excellent. A record number of consumers were added to the company’s postpaid plans. The overall projection was increased by management, improving their view of sales and profitability.
The subscriber services offered by T-Mobile had a successful quarter. A net of 1.7 million postpaid clients, including 723 thousand cellular phones, were added to the company. The corporation later increased its projection for subscriber growth by more than 10%. The estimated postpaid customer increase for 2022 is now 6 to 6.3 million subscribers. Management noted that T-Mobile added more postpaid subscribers in the third quarter during the earnings call than AT&T (T) and Verizon (VZ) put together.
Revenues from postpaid services at T-Mobile increased by 9% yearly. Core adjusted EBITDA increased by 10% from the previous year. These outcomes show that T-Mobile is seeing strong growth. This is particularly significant in a sector with weaker overall development. The fact that T-Mobile is a pure-play mobile internet firm appeals to me. This tactic enables management to concentrate on gaining clients across market categories.
In terms of 5G, T-Mobile is regarded as the industry pioneer. Ookla’s market research shows that T-Mobile has the highest 5G availability. Additionally, their 5G speeds are faster than those of AT&T and Verizon. The service at T-Mobile has repeatedly been characterized by management as two years ahead of the competition.
T-earnings Mobile’s release wasn’t terrific on its own, though. Revenue marginally below forecasts, while EPS revealed a $0.09 net loss. The loss was $1.00 per share, which the business blamed on merger-related expenses. Additionally, Sprint’s wireline assets were impaired by $0.29 per share, and a settlement for a cyberattack cost $0.23 per share. Fortunately, most of these extra costs won’t have a lasting impact on the business.
A Rise in Additional Revenue
The T-Mobile incremental revenue growth is interesting to me. The business is increasing revenue per user significantly while avoiding outright price increases. The average postpaid revenue per account for the business climbed 3.3% annually. Their average postpaid revenue per user climbed by 2.8% yearly. A 3% increase in postpaid ARPA is anticipated for the entire year. T-Mobile has promised to hold the price level for the foreseeable future. This expansion is the result of further investments in premium or value-added services.
I believe this tactic carries certain hazards. It might become more challenging for T-Mobile to maintain top-line growth as inflation rises. The business is attempting to use its fixed rate and reduced cost pricing to attract new customers. If industry churn declines, this might make expansion challenging. However, I don’t currently see a lot of evidence supporting this. These headwinds appear to be controllable thus far.
Internet Broadband Markets are Expanding
T-Mobile sees excellent results in its core business and its more recent products. The business’s high-speed internet service produced awe-inspiring results.
The internet services offered by the business are a crucial part of T-expansion Mobile’s plan. They include an additional service not part of the business’s mobile phone offerings. It’s a chance to increase existing client revenue incrementally in exchange for a valuable service.
T-Mobile might, as a result, grow considerably more quickly than the market. It’s an opportunity to take on established internet service providers. Low customer satisfaction is typical of legacy internet enterprises, and the market is susceptible to upheaval.
During the quarter, T-Mobile attracted 560,000 new users to its internet service. With a 436 percent increase from the previous year, the business currently has 1.54 million clients. The business has led the sector in net additions for the third straight quarter. I think T-Mobile is taking full advantage of this excellent opportunity.
The Merger’s Closing Stages
T-Mobile is still progressing in incorporating Sprint’s assets into its operations. By the end of the following quarter, the business anticipates that Sprint’s network will completely shut down. Even so, management increased their forecast for merger synergies by $200 million.
For T-earnings, Mobile’s ongoing merger costs have been the main obstacle. However, these costs are almost finished. Almost all of Sprint’s customers use T-network Mobile. On their most recent earnings call, management reviewed the most recent initiatives.
“And speaking of network, we just hit some major integration milestones. Just over two years since we closed the merger, we have successfully shutdown most of the Sprint network. As of the end of the quarter, we had cumulatively decommissioned nearly two-thirds of the 35,000 targeted sites and can now report that we will be substantially complete by the end of Q3 this current quarter, remarkable work by the team to deliver these milestones ahead even of our recent year-end target and more than one year earlier than our original merger plan…”
“Merger-related costs, which are not included in core adjusted EBITDA and are expected to be between $4.7 billion and $5.0 billion before taxes, primarily representing network activities. With Q2 being the peak quarter, we expect that Q3 will be closer to Q1 levels, and then taper off in Q4.”
These initiatives have some implementation risk, just like most significant shifts. While expanding their 5G network, I believe T-Mobile’s management has done an excellent job transitioning legacy consumers. According to management’s remarks, industry challenges like inflation and chip shortages appear to have had little impact on them.
The Valuation is Fair
Considering the company’s impressive performance, I believe T-Mobile’s shares are highly undervalued. Trading prices for the corporation are six times core adjusted EBITDA. The company is trading at an EV to adjusted EBITDA ratio of just over ten after accounting for debt. This is an excellent deal for a company that can increase its earnings by 10%.
I often stay away from adjusted stats. But in this instance, I believe that T-core Mobile’s adjusted EBITDA measures better capture the company’s true nature. The costs associated with the merger are currently affecting the company’s GAAP metrics. But I believe the peak has already been reached. The CEO of T-Mobile referred to 2022 as “the peak capital year in our business plan” on their first-quarter earnings call.
Anticipated to Produce Returns for Shareholders
Over the coming years, capital expenditures and merger costs will probably slow down. As a result, I believe T-Mobile will produce a significant amount of free cash flow.
The corporation has retained the option to repurchase shares for up to $60 billion between 2023 and 2025. This is around 36 percent of the outstanding shares of the corporation. Currently, speculation surrounds the specifics of this. However, I believe it is evident that management wants to return money to shareholders.
Final Conclusion
T-Mobile is a great business with excellent growth prospects. There is some execution risk regarding price and the overall economic climate. Still, I believe the business has a clear route to long-term success. The broadband market offers T-Mobile a chance to achieve steady revenue growth. In my opinion, the shares are reasonably priced to start an investment.
Featured Image: Megapixl © Everythingpossible
