Verizon Communications (NYSE:VZ) used to be the leader in wireless, but it has now been overtaken by T-Mobile (NYSE:TMUS), and the market is taking note.
Initially, Verizon was the clear leader during the 4G era after making heavy investments in its network infrastructure and acquiring spectrum licenses. This allowed it to gain a massive number of subscribers and increase its pricing.
Not one to be left behind, AT&T (NYSE:T) gave management the leeway to splurge on its infrastructure upgrade. Lacking the scale to compete with these bigger players, T-Mobile and Sprint ended up being the laggards in this race and resorted to giving discounts to attract customers to their inferior networks.
The landscape, however, changed as the world transitioned to 5G. a little over two years after T-Mobile acquired Sprint, the latter’s business has been booming. The wireless carrier is now winning awards thanks to its 5G network and has been steadily grabbing market share due to its industry-low pricing on its mobile plans.
As T-Mobile gets into the final and most expensive phase of its Sprint integration, shareholders are set to become the primary beneficiaries as the company prepares to redirect surplus cash flow to stock buybacks.
It is hard to overstate just how much the transition to 5G has disrupted the competitive landscape for the U.S wireless market. The industry is still in the early stages of the shift to next-generation networks, which are much faster and offer better performance in crowded areas compared to previous technologies by using higher frequencies and more antennas.
T-Mobile’s acquisition of Sprint, which closed in April 2020, has put it in the leading position after it gave the company an impressive portfolio of wireless-spectrum licenses for 5G. The combined entity’s more extensive operational network and customer base translate to deeper pockets and a sizable war chest for capital expenditures to be deployed on the network.
T-Mobile now boasts over 100 million subscribers, far surpassing AT&T. By the end of June, T-Mobile’s mid-band spectrum network was accessible to over 235 million Americans. Additionally, while the company has committed about $14 billion to capex this year which may be less than its rivals, it is still more than double its pre-acquisition rate.
T-Mobile’s Q2 Results Illustrate Its Strengthening Position in Wireless
T-Mobile has managed to continue gaining market share from rivals AT&T and Verizon without raising prices which have translated to growing average revenue per user (ARPU). That’s because more customers have been opting for T-Mobile’s premium tiers which offer more features, implying that the service is attracting higher-value customers. As such, T-Mobile has room to expand profit margins in the future from the current 4% to match Verizon and AT&T’s margins which are in the mid-teens.
During the second quarter earnings, T-Mobile’s lead was obvious. It surpassed competitors, adding an impressive 1.7 million postpaid customers, a critical metric for wireless carriers that highlights the number of customers paying a monthly bill, and also surpassed Wall Street’s expectations on a number of key metrics. The company further raised guidance across the board.
On the other hand, Verizon failed to meet expectations, lost postpaid subscribers, and slashed guidance for the second consecutive quarter. Although AT&T reported robust subscriber gains, its spending on promotions to spur growth resulted in reduced cash flow.
According to Morgan Stanley’s analyst Simon Flannery who called T-Mobile his top pick, the company delivered by far the cleanest quarter among the Big Three as management continued to execute on all fronts.
For now, it appears that most of this shift has been priced in the shares. T-Mobile’s stock has managed to remain relatively unchanged over the past year at $147 per share compared to Verizon and AT&T’s 21% and 8% decline over the same timeframe.
Featured Image: Megapixl @Mesutdogan
