T-Mobile's (TMUS, Financial) successful merger with Sprint has put the company on the forefront of the 5G technology race, challenging the dominance of other players like Verizon (VZ, Financial) and AT&T (T, Financial).
The newly combined company was able to maintain its leadership in the 5G network by investing more than $9.3 billion in the recently held FCC's Auction 107, also known as the C-Band auction. This mid-band can support fast and ubiquitous service for all Americans. T-Mobile already has a significant number of mid-band frequencies and is acquiring an additional mid-band spectrum to uplift the quality of its 5G network and edge out its rivals.
The company is continuing to generate strong cost synergies from the Sprint acquisition and witnessed another strong quarter with customer growth on the prepaid as well as the postpaid front. Thus, let's take a more in-depth look at the company to see if it is a good buy at the current price current levels.
Financial results
T-Mobile managed to deliver yet another all-around beat in its Q4 2020 earnings result. The company reported revenue of $20.34 billion for the quarter, which was up 71.25% as compared to the pre-Sprint-merger revenues of $11.88 billion reported in the corresponding quarter of 2019. Through increased postpaid wireless phone subscriptions, the company was able to surpass the Wall Street revenue expectations, which averaged around $19.93 billion. Revenues translated into a gross margin of 55.17% and an operating margin of 11.78%, which was higher than that in the same quarter of last year.
T-Mobile reported net income of $750 million and adjusted earnings per share (EPS) of 60 cents, which was above the analyst consensus estimate of 51 cents. The company generated $3.47 billion in the form of operating cash flows but spent around $3.65 billion in investing activities, mostly in the mid-band auctions.
The 5G race for leadership
T-Mobile has already added close to a million postpaid wireless phone subscribers, resulting in a massive lead over peers Verizon and AT&T in the deployment of the 5G network. In fact, the company's 5G network buildout using 2.5GHz is already covering over 100 million people, which is multiple times higher than Verizon's 5G Ultra-Wideband high-frequency network (the management claims their 5G coverage is 50 times greater than Verizon, although it is worth noting that Verizon's low-band 5G covers nearly 230 million people).
After the big win in the mid-band auctions despite Verizon's heavy spending, T-Mobile is maintaining its 5G leadership. It is worth highlighting that the company has immense financial backing from Deutsche Telekom (XTER:DTE, Financial) as well. The company's leading position and rapid growth in 5G is definitely a strong driver for postpaid additions in 2021.
Sprint acquisition synergies
After a nearly two-year battle with regulators, T-Mobile was finally able to close the Sprint acquisition in April 2020, and the company is well on track to make the most of this acquisition.
The company's biggest achievement was its ability to retain most of Sprint's customer base and driving a low churn. The management claims to have achieved their goal of realizing close to $1.2 billion in cost savings through the Sprint acquisition and this number is expected to double in 2021 as the company decommissions Sprint cell towers and continues with the post-merger integration.
It is worth noting that the management claimed that it could generate $43 billion worth of synergies from the $30 billion Sprint acquisition over the years. They have certainly managed to surpass their targets on the 5G front, so I think investors can be optimistic on the dealsynergies front as well.
Valuation
Looking at a comparative valuation of the three telecom giants, we can get an idea of the market perception of them relative to each other. We see AT&T trading at the lowest enterprise-value-to-revenue multiple of around 2.36 given its struggles with the media businesses and a possible conglomerate discount that the market is applying to its valuation. Verizon was once the highest in terms of this multiple until around 12 months ago, but after the Sprint merger, it has also dropped well below T-Mobile's enterprise-value-to-revenue multiple.
T-Mobile has certainly lived up to the investor optimism so far with its auctions success and good results, but a high valuation multiple also means that the company's stock price could fall rapidly if the company is unable to realize the perceived synergies and growth. Even the GF Value metric is showing the stock as heavily overvalued, and most of its other multiples apart from the enterprise-value-to-revenue ratio are well above the industry averages. Overall, I recommend strong caution on the part of investors holding this stock.
Disclosure: No positions.
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