T-Mobile US stock jumped Tuesday after analysts at Goldman Sachs added shares of the wireless-services company to its list of the best ideas in telecommunications for 2022. That spot on the roster came at the expense of Verizon Communications.,
Whose stock fell on Tuesday.
T-Mobile (ticker: TMUS) stock was up 3.2% in afternoon trading on Tuesday, while Verizon (VZ) gained 0.9% and the S&P 500 index rose 0.5%.
COVID-19 provided a major boost to customer growth among wireless-service providers in late 2020 and through 2021. It’s a tempting time for Americans to rely more on their phone and internet plans to switch or upgrade to work during the pandemic. Government stimulus payments and lots of consumer savings fueled demand. The same goes for the cable industry.
Brett Feldman of Goldman Sachs observes that the industry-wide growth tailwind is weakening in 2022, as competition mounts: “After a period of record growth in postpaid phone and cable broadband customers, driven by lockdowns and incentives, we are looking at these Both expect a slowdown in core telcos. services in 2022,” he wrote on Tuesday. “Furthermore, as wireless, cable and fiber providers increasingly compete with each other in mobile and fixed services, we expect investors to maintain a cautious approach to these end markets.”
Feldman estimates that the industrywide postpaid phone net added 9.3 million in 2021, up from 6.2 million in 2020 and 6.4 million in 2019. This would represent a record year for the closely watched metric, which includes customers using smartphones who pay monthly bills. But the good times won’t last forever: Feldman expects a 20% drop in 2022 to add 7.4 million net.
Telecom stocks fell broadly in late 2021, as investors fret over the subscriber-growth outlook. According to Feldman, this has left many with very cheap valuations and potential opportunities for investors.
He’s particularly bullish on the wireless industry “challengers:” T-Mobile and the cable companies’ mobile virtual network operator, or MVNO, offerings. These include Comcast (CMCSA) Xfinity Mobile and Charter Communications (CHTR) Spectrum Mobile. The companies do not have their own wireless network infrastructure, but instead have wholesale agreements with Verizon to provide service on its network.
If industrywide customer growth becomes more scarce, the most competitive offering should be the best for consumers, Feldman argues. From a purely price perspective, T-Mobile and cable MVNOs undercut equivalent services from Verizon and AT&T(T).
T-Mobile will have the added benefit of continued progress in 2022 on the integration of Sprint’s operations, customer base and network on which it has been working since acquiring its smaller competitor in 2020. That means cost savings and less headwinds than former Sprint customers canceling when they change their service or account.
Feldman predicts that share buyback discussions should open up by the second half of the year. T-Mobile management has said that the company’s post-sprint integration annual free cash flow could exceed $18 billion by 2026, after steadily moving toward that figure. He also talked about the potential for share buybacks worth $60 billion from 2023 to 2025—versus the current market value of about $135 billion.
T-Mobile stock is down about 27% since mid-July (a major customer-data breach didn’t help either), while the S&P 500 is up 8%. Shares now trade for an enterprise value of 7.8 times Feldman’s estimate for 2022 earnings before interest, taxes, depreciation, and amortization, or EBITDA. This compares to 7.6 times Verizon stock trading the same metric. When adjusted for expected synergies and capital expenditures, T-Mobile’s stock is at a discount to Verizon, according to Feldman’s math. The same is true when using 2023 projections or focusing on free cash flow per share instead of EBITDA.
Feldman wrote, “For all of these metrics, we see the relative valuation of TMUS versus VZ as attractive because we expect T-Mobile to grow materially faster than Verizon, thanks to our continued share gains.” depending on the point of view.”
He believes T-Mobile’s stock valuation should be closer to that of Charter, which has a similar growth outlook. Feldman has a buy rating and a $153 price target on T-Mobile, which is 9.5 times expected 2022 EBITDA, 2022 projected free cash flow per share, and based on its discounted cash flow model.
That’s up about 40% from current levels at $109 a share, and gives T-Mobile a spot on Feldman’s “conviction list.” They still have a buy rating on Verizon stock, but removed it from the list this year over concerns about customer growth. His $63 price target is roughly 18% higher than Verizon stock’s recent levels.
Feldman’s other best ideas in telecommunications in 2022 include Comcast and Frontier Communications (FYBR).
Write to Nicholas Jasinski at [email protected]