Thematic evaluation
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T-Mobile US, Inc. (TMUS)

September 06, 2024

Compared to: AT&T, Inc. (T) | Verizon Communications, Inc. (VZ) | The Communication Services Select Sector SPDR Fund (XLC)

Our reasoning

T-Mobile's current valuation appears fair, balancing its strong market position, growth prospects, and improving profitability against potential risks and high competition. While some metrics suggest overvaluation (P/E ratio), others indicate potential undervaluation (EV/EBITDA, EV/Sales), and the company's strong execution and growth opportunities support its current valuation.

Key takeaways
  • T-Mobile is a strong performer in the wireless telecommunications industry, demonstrating strong financial performance, operational efficiency, and growth opportunities.
  • The company has a strong track record of customer growth, profitability, and free cash flow generation, driven by its focus on network leadership, capital efficiency, and value-driven offerings.
  • T-Mobile's strategic focus on expanding its fixed wireless broadband offering and pursuing strategic acquisitions positions it for continued growth.
  • The company faces several risks and threats, including cybersecurity incidents, regulatory changes, competition, and macroeconomic uncertainty.
  • T-Mobile's valuation metrics are generally in line with its peers, suggesting that the company is fairly valued, with potential for further valuation expansion driven by its strong growth prospects.
  • T-Mobile's stock price has generally outperformed its benchmark and peers, but it has also been more volatile.
  • The company's future outlook is positive, with management expressing confidence in its growth prospects and analysts expecting continued strong performance.
  • Overall, T-Mobile appears to be a strong performer in the wireless telecommunications industry, offering investors the potential for higher returns but with a higher level of risk.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • T-Mobile US, Inc. is a leading provider of wireless communications services in the United States, offering postpaid and prepaid wireless voice, messaging, and data services, as well as wholesale wireless services. The company operates under the T-Mobile and Metro by T-Mobile brands, serving a diverse customer base across various market segments.
    • T-Mobile's revenue is primarily generated from its wireless service offerings, with postpaid customers contributing the majority of service revenues. The company also generates revenue from device sales, accessories, and other services.
    • T-Mobile's target market includes individuals, families, businesses, and government agencies seeking reliable and affordable wireless communication solutions. The company competes against other major carriers like AT&T and Verizon, as well as smaller regional and MVNO providers.
    • For comparative analysis, we will be using The Communication Services Select Sector SPDR Fund (XLC) as a benchmark and Verizon Communications, Inc. (VZ) and AT&T, Inc. (T) as industry peers.

  2. Financial Performance:

    • T-Mobile has demonstrated strong and improving profitability over recent quarters, driven by its focus on cost control and operational efficiency.
    • Revenue growth has been moderate, driven by strong customer growth across postpaid and prepaid segments, as well as the successful integration of the Mint Mobile and Ultra Mobile acquisitions.
    • Gross margin, operating margin, and net margin have been increasing, indicating improved profitability.
    • ROA, ROE, and ROIC have also been trending upwards, reflecting the company's efficient use of assets and capital.
    • Compared to its peers, T-Mobile has consistently outperformed VZ and T in terms of revenue growth, profitability, and return on capital.

  3. Operational Efficiency:

    • T-Mobile has demonstrated improved operational efficiency over recent quarters, as evidenced by its decreasing accounts receivable and inventories.
    • The company's focus on capital efficiency and its strategic shift towards a more asset-light business model are contributing to its improved operational efficiency.
    • T-Mobile is generating strong free cash flow, which provides it with ample capacity to repay debt obligations, invest in growth opportunities, and return capital to shareholders.
    • Capital expenditures have been decreasing, reflecting the company's focus on capital efficiency and the maturity of its network infrastructure.
    • T-Mobile has a strong liquidity position, as evidenced by its increasing cash and short-term investments.
    • The company's strong operating cash flow generation provides it with ample short-term liquidity.
    • T-Mobile's debt-to-equity and leverage ratios have been increasing, raising concerns about its long-term solvency. However, the company's strong free cash flow generation and its ability to manage debt obligations suggest a healthy long-term solvency position.
    • Compared to its peers, T-Mobile has shown better operational efficiency, as evidenced by its higher free cash flow margin and lower capital expenditures.

  4. Growth Opportunities:

    • T-Mobile is pursuing growth opportunities through market expansion, strategic acquisitions, and technological innovation.
    • The company is expanding its fixed wireless broadband offering, leveraging its nationwide 5G network to capture a growing share of the broadband market.
    • T-Mobile has recently completed the acquisition of Ka'ena Corporation, including its Mint Mobile and Ultra Mobile prepaid brands, and is pursuing the acquisition of UScellular's wireless operations and spectrum assets.
    • The company is also investing in its 5G network infrastructure and exploring opportunities in fiber broadband through joint ventures with Lumos and Metronet.
    • T-Mobile's strategic focus on network leadership, capital efficiency, and value-driven offerings has translated into industry-leading service revenue growth, core EBITDA expansion, and adjusted free cash flow generation.

  5. Risks and Threats:

    • T-Mobile faces several risks and threats, including cybersecurity incidents, regulatory changes, competition, and macroeconomic uncertainty.
    • The company has experienced numerous lawsuits and regulatory inquiries related to cybersecurity incidents, which could result in significant costs and liabilities.
    • Regulatory changes and legal/compliance issues, including the Government Commitments from the Sprint merger, continue to be an area of focus and potential risk for the company.
    • The wireless communications industry remains highly competitive, with T-Mobile facing ongoing competition for customers from other major carriers and smaller providers.
    • Macroeconomic factors, such as inflation, interest rates, and geopolitical instability, could impact the company's financial performance and liquidity.

  6. Valuation Analysis:

    • T-Mobile's valuation metrics, such as P/E, EV/EBITDA, and price-to-sales, are generally in line with its peers, suggesting that the company is fairly valued.
    • The company's strong growth prospects, coupled with its improving profitability and free cash flow generation, could support further valuation expansion.
    • Potential catalysts for valuation growth include continued customer growth, successful integration of acquisitions, and expansion into new markets.

  7. Price Performance:

    • T-Mobile's stock price has generally outperformed its benchmark, XLC, and its peers, VZ and T, over most periods, particularly in the short term.
    • The company's stock price has been more volatile than its peers, but its overall trend suggests that it has been a strong performer in the wireless telecommunications industry.
    • T-Mobile's beta value is slightly higher than its peers, indicating that it is slightly more sensitive to market movements. However, this sensitivity is still relatively low, suggesting that T-Mobile is not overly exposed to market volatility.

  8. Future Outlook:

    • T-Mobile's management has raised its full-year 2024 guidance for total postpaid customer net additions and adjusted free cash flow, indicating confidence in the company's growth prospects.
    • Analyst estimates for T-Mobile's future performance are generally positive, reflecting the company's strong financial performance, growth opportunities, and market leadership.
    • The company's continued focus on network leadership, capital efficiency, and value-driven offerings is expected to drive continued revenue growth, margin expansion, and free cash flow generation.

  9. Summary:

    • T-Mobile is a leading provider of wireless communications services in the United States, demonstrating strong financial performance, operational efficiency, and growth opportunities.
    • The company has a strong track record of customer growth, profitability, and free cash flow generation.
    • T-Mobile's strategic focus on network leadership, capital efficiency, and value-driven offerings is expected to drive continued growth and profitability.
    • The company faces several risks and threats, including cybersecurity incidents, regulatory changes, competition, and macroeconomic uncertainty.
    • T-Mobile's valuation metrics are generally in line with its peers, suggesting that the company is fairly valued.
    • The company's strong growth prospects, coupled with its improving profitability and free cash flow generation, could support further valuation expansion.
    • T-Mobile's stock price has generally outperformed its benchmark and peers, but it has also been more volatile.
    • The company's future outlook is positive, with management expressing confidence in its growth prospects and analysts expecting continued strong performance.
    • Overall, T-Mobile appears to be a strong performer in the wireless telecommunications industry, offering investors the potential for higher returns but with a higher level of risk.
Peer fundamentals 
Fundamentals
Insights
  • T-Mobile is demonstrating strong and improving profitability, driven by its focus on cost control and operational efficiency.
  • The company is generating strong free cash flow, which provides it with ample capacity to repay debt obligations, invest in growth opportunities, and return capital to shareholders.
  • The company's increasing long-term debt levels raise concerns about its long-term solvency.
  • The company's exposure to cybersecurity incidents and the ongoing legal fallout remain a significant risk.
  • The company's substantial debt load and the need to service its obligations could constrain its financial flexibility and ability to invest in growth opportunities.
  • Regulatory changes and legal/compliance issues, including the Government Commitments from the Sprint merger, continue to be an area of focus and potential risk for the company.
  • T-Mobile is well-positioned for continued growth and profitability in the coming quarters, driven by its strong customer growth, its focus on cost control and operational efficiency, and its strategic initiatives.
Analysis
  • Revenue - T-Mobile is experiencing moderate revenue growth, driven by strong customer growth across postpaid and prepaid segments, as well as the successful integration of the Mint Mobile and Ultra Mobile acquisitions. - The company's revenue growth is expected to remain moderate in the coming quarters, driven by continued customer growth and the expansion of its fixed wireless broadband offering.
    • Profitability
      • T-Mobile is demonstrating strong and improving profitability, as evidenced by its increasing gross margin, operating margin, and net margin.
      • The company's focus on cost control and operational efficiency is driving margin expansion.
      • The company's profitability is expected to continue improving in the coming quarters, driven by continued customer growth, capital efficiency, and the realization of synergies from the Sprint merger.
    • Liquidity
      • T-Mobile has a strong liquidity position, as evidenced by its increasing cash and short-term investments.
      • The company's strong operating cash flow generation provides it with ample short-term liquidity.
      • The company's liquidity position is expected to remain strong in the coming quarters, driven by its continued strong cash flow generation.
    • Solvency
      • T-Mobile's increasing long-term debt levels raise concerns about its long-term solvency.
      • The company's strong free cash flow generation and its ability to manage debt obligations suggest a healthy long-term solvency position.
      • The company's solvency position is expected to remain healthy in the coming quarters, driven by its continued strong free cash flow generation.
    • Operational Efficiency
      • T-Mobile is demonstrating improved operational efficiency, as evidenced by its decreasing accounts receivable and inventories.
      • The company's focus on capital efficiency and its strategic shift towards a more asset-light business model are contributing to its improved operational efficiency.
      • The company's operational efficiency is expected to continue improving in the coming quarters, driven by its continued focus on cost control and its successful integration of acquisitions.
    • Cash Flow Analysis
      • T-Mobile is generating strong free cash flow, which provides it with ample capacity to repay debt obligations, invest in growth opportunities, and return capital to shareholders.
      • The company's cash flow generation is expected to remain strong in the coming quarters, driven by its continued profitable customer growth and its focus on capital efficiency.
    • Risk Factors
      • T-Mobile's increasing long-term debt levels raise concerns about its long-term solvency.
      • The company's exposure to cybersecurity incidents and the ongoing legal fallout remain a significant risk.
      • The company's substantial debt load and the need to service its obligations could constrain its financial flexibility and ability to invest in growth opportunities.
      • Regulatory changes and legal/compliance issues, including the Government Commitments from the Sprint merger, continue to be an area of focus and potential risk for the company.
    • Future Outlook
      • T-Mobile is well-positioned for continued growth and profitability in the coming quarters.
      • The company's strong customer growth, its focus on cost control and operational efficiency, and its strategic initiatives are expected to drive continued revenue growth and margin expansion.
      • The company's strong free cash flow generation provides it with financial flexibility to pursue growth opportunities and navigate economic downturns.
      • The company's solvency position is expected to remain healthy, but its increasing debt levels will need to be carefully monitored.
      • The company's exposure to cybersecurity incidents and the ongoing legal fallout remain a significant risk.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-08-09)
The Communication Services Select Sector SPDR Fund (XLC)
  • Performance Comparison: TMUS has generally outperformed XLC over most periods, particularly in the short term (1 week, 1 month, 3 months, 6 months, and 1 year). However, over longer periods (2 years and 3 years), XLC has outperformed TMUS. This suggests that TMUS may be more suitable for short-term investments, while XLC may be more suitable for long-term investments.
  • Risk and Return Analysis: TMUS has shown higher annualized returns than XLC over the 1-year and 3-year periods, indicating that it has generated higher returns for investors. However, TMUS has also shown higher annualized volatility than XLC, suggesting that it is more susceptible to price fluctuations. This is further supported by the drawdown figures, where TMUS has experienced a maximum drawdown of 28.57%, while XLC has experienced a maximum drawdown of 46.65%. This indicates that TMUS has been more resilient to market downturns than XLC.
  • Risk-Adjusted Performance: XLC has consistently shown a higher Sharpe ratio than TMUS across most periods, indicating that XLC has offered better risk-adjusted returns. This suggests that XLC has been able to generate higher returns for investors while taking on less risk. TMUS's lower beta value suggests a lower risk profile compared to XLC. This means that TMUS is less likely to experience large price swings in response to market fluctuations.
  • Overall Assessment: TMUS has shown strong performance, particularly in the short term, but it has also been more volatile than XLC. This suggests that TMUS may be a suitable investment for investors seeking higher returns but are willing to accept higher risk. XLC, on the other hand, has offered better risk-adjusted returns, making it a more suitable investment for investors seeking a more stable and less volatile investment. Investors should consider their individual risk tolerance and investment goals when making investment decisions.
Peers Price History(as of 2024-09-04)
AT&T, Inc. (T)Verizon Communications, Inc. (VZ)
  • Performance Comparison:
    • TMUS has consistently outperformed VZ and T over all the periods analyzed, demonstrating strong growth and market share gains. This outperformance is particularly notable in the longer-term periods, highlighting TMUS's ability to sustain its growth trajectory.
    • TMUS's performance has been more volatile than VZ and T, with periods of outperformance followed by periods of underperformance. However, the overall trend suggests that TMUS has been a strong performer in the wireless telecommunications industry.
  • Risk and Return Analysis:
    • TMUS has delivered higher annualized returns than VZ and T over all the periods analyzed, indicating its ability to generate strong returns for investors.
    • TMUS has also exhibited higher annualized volatility than VZ and T, suggesting that it carries a higher level of risk. This is further supported by its higher maximum drawdown compared to VZ and T.
    • The higher volatility and maximum drawdown of TMUS suggest that it may be a more suitable investment for investors with a higher risk tolerance.
  • Risk-Adjusted Performance:
    • TMUS has generally offered a better risk-adjusted return than VZ and T, as evidenced by its higher Sharpe Ratio. This suggests that TMUS has been able to generate higher returns for investors while taking on a relatively similar level of risk.
    • TMUS's beta value, while below 1, is slightly higher than VZ's and T's, indicating that it is slightly more sensitive to market movements. However, this sensitivity is still relatively low, suggesting that TMUS is not overly exposed to market volatility.
  • Overall Assessment:
    • TMUS has demonstrated strong performance, outperforming its peers VZ and T over various periods. This outperformance is driven by its strong growth and market share gains.
    • TMUS carries a higher level of risk than VZ and T, as evidenced by its higher volatility and maximum drawdown. However, its higher Sharpe Ratio suggests that it has been able to generate higher returns for investors while taking on a relatively similar level of risk.
    • TMUS's beta value indicates that it is slightly more sensitive to market movements than VZ and T, but it is still considered less volatile than the overall market.
    • Overall, TMUS appears to be a strong performer in the wireless telecommunications industry, offering investors the potential for higher returns but with a higher level of risk.
Peers Fundamentals(as of 2024-06-30)
AT&T, Inc. (T)Verizon Communications, Inc. (VZ)

  1. Market Position and Size:

    • TMUS is the largest company in the peer group, with a market cap of 231,956.0 million, significantly larger than VZ and T.
    • TMUS's market cap is significantly larger than its peers despite having lower revenue, EBITDA, and net income, suggesting that the market is placing a premium on its growth potential.
    • TMUS's larger market cap and higher revenue compared to its peers indicate a dominant market position within the wireless telecommunications industry.

  2. Profitability and Efficiency:

    • TMUS has a strong EBITDA Margin and a relatively high Net Profit Margin, indicating a strong ability to generate profits.
    • TMUS's ROA and ROE are significantly higher than its peers, indicating efficient utilization of its assets and capital to generate returns for shareholders.
    • TMUS's profitability metrics are generally strong, exceeding those of its peers but falling short of industry averages in some areas.

  3. Financial Health and Stability:

    • TMUS has a moderate level of liquidity, with enough current assets to cover its current liabilities.
    • TMUS has a high level of debt relative to its equity, but it is still lower than the industry average.
    • TMUS's liquidity and debt position are moderate in relation to its market cap and peer group.

  4. Valuation and Market Perception:

    • TMUS's valuation metrics are generally lower than the industry average, suggesting that the market may be undervaluing the company.
    • This could be due to investor expectations of future growth, which are reflected in its higher market cap despite lower revenue and earnings.

  5. Cash Flow and Capital Management:

    • TMUS's cash flow generation strength is relatively weaker compared to its size and peers.
    • TMUS is investing less in capital projects compared to its peers.

  6. Growth and Future Prospect:

    • TMUS shows consistently higher growth in Net Income, Basic Earnings per Share, Free Cash Flow, and Free Cash Flow Margin compared to the peer group average.
    • TMUS exhibits significant year-to-year fluctuations in Free Cash Flow and Free Cash Flow Margin, suggesting that its cash flow generation can be volatile.
    • TMUS's 3-year CAGR for Net Income, Basic Earnings per Share, and EBIT Margin is higher than its 5-year CAGR, indicating an acceleration in growth in these areas.
    • TMUS's growth is concentrated in profitability and cash flow generation metrics, while revenue growth has been decelerating.

  7. Potential for Investment:

    • TMUS presents an attractive investment opportunity due to its strong profitability, efficient operations, and growth in profitability.
    • Investors should be aware of the risks associated with its high debt levels and decelerating revenue growth.

  8. Key Risks and Considerations:

    • TMUS's high debt levels could pose a risk to its financial stability if interest rates rise.
    • The deceleration in revenue growth raises concerns about the sustainability of TMUS's growth trajectory and its ability to maintain its market share gains.

  9. Overall Assessment:

    • TMUS is a financially strong company with a dominant market position, high profitability, and efficient operations.
    • However, its high debt levels and decelerating revenue growth raise concerns about the sustainability of its growth trajectory.
    • Investors should carefully consider these risks and the company's overall growth profile before making an investment decision.