T-Mobile US Inc. (TMUS, Financial) was spun off from Deutsche Telekom in 2002, and subsequently debuted in 2013 after its merger with MetroPCS. Former CEO John Legere, holding the post between 2012 and 2020, led a remarkable campaign positioning T-Mobile as the “Un-Carrier,” with the objective of shaking up the status quo and solving customer pain points in a unique manner.
Examples of past “Un-Carrier” moments include:
- Binge On, which allowed customers unlimited mobile streaming as long as it was in 480 pixels resolution, and free Netflix (NFLX, Financial) for subscribers to certain T-Mobile Magenta and T-Mobile ONE plans. This paved the way for the company's unlimited data plans, which have now become an industry standard.
- Simple Global, which allowed T-Mobile customers on the plan free talk, text and 2G data in foreign countries, important in an increasingly globalized world.
- Carrier Freedom, where T-Mobile would pay off existing device installment payments on other carriers in exchange for switching to T-Mobile.
- T-Mobile Tuesdays, where customers receive discounts at retailers, restaurants and other services.
T-Mobile’s most consequential move was going “all unlimited” for its postpaid plans beginning in January 2017, which forced all other carriers to follow suit and allowed it to take market share. In conjunction, T-Mobile included all taxes and fees in its advertised prices, essentially giving customers a discount. The company’s unconventional, industry-disrupting moves attracted the attention of gurus, including David Tepper (Trades, Portfolio) of Appaloosa Management since late 2017, who now has the stock as the third-largest position in his equity portfolio.
So why now? There are a number of factors that make T-Mobile compelling at this juncture. For one, wireless service is a necessity – customers can cut out cable, video streaming, restaurants and travel from their monthly budgets, but data and talk-time is a necessity.
How is T-Mobile placed to take advantage of what is essentially a feature of this market? The company not only has the lowest priced mobile service offering, but thanks to its 2017 purchase of the 600MHz spectrum, 2020 acquisition of Sprint and 2021 purchase of additional mid-band spectrum, T-Mobile is now also the largest 5G network in the United States.
The company is also unburdened by dividend payouts unlike rivals Verizon (VZ, Financial) ($10.39 billion in dividends paid in the last 12 months) and AT&T (T, Financial) ($15 billion in dividends paid in the last year). This gives T-Mobile the firepower to match their spending and vault ahead in the capital-intensive 5G buildout.
The combination of a lower-priced offering with a superior customer experience sets the stage for T-Mobile to disrupt the wireless industry to an even greater extent than it already has. In addition, 5G LTE has the capability to act as a home broadband alternative, giving the company another vast, oligopolistic industry to go after. As of today, the market is still undervaluing T-Mobile based on a relatively moderate growth-synergy story, and severely undervaluing shares if the “disruption + broadband” case takes hold. The company’s future trajectory continues to attract the attention of gurus like Lee Ainslie (Trades, Portfolio) of Maverick Capital, whose holding in the company is now valued at $153 million.
No longer a duopoly
Although other carriers have since followed suit and tried to match T-Mobile’s value proposition with their own unlimited plans, albeit at higher price points, the company has continued to gain market share in the industry and has much lower churn – an industry best at 0.9%.
Essentially, T-Mobile has been undercutting a fat and happy duopoly on price, all the while investing in bringing up its so-called “lagging” network to match Verizon’s and AT&T’s speed and coverage. Over the years, the company has built its wireless 4G networks into a formidable competitor, to the extent that there is now very little daylight between the three networks. With 4G networks now commoditized in terms of speed and coverage, customers switched to T-Mobile’s superior value proposition and price point, allowing it to take market share.
The T-Mobile growth story is only just beginning, however, with 5G and the acquisition of Sprint giving the company the potential to have a superior network at the lowest price, and helping write its next disruptive chapter.
The advent of 5G
Why is 5G such a big deal? To understand the potential applications, it's helpful to compare the technology against the existing standard, 4G. Download speeds on 5G are over 100 times faster than 4G and latency (time elapsed from when data is sent to when it is received) is over 200 times better. These performance gains also come with added efficiency, with 5G network energy usage up to 90% less than that of 4G, while also being able to support 10 times more devices per square kilometer.
What does this mean for the end user? Faster browsing, 4K streaming, augmented reality becoming practical, self-driving cars, remote surgery and the internet of virtually everything…the applications are endless. Companies that can dominate the 5G value chain stand to make huge gains off of what is being called the next industrial revolution.
To understand how carriers are approaching 5G, it’s necessary to understand what spectrum is. There are broadly three types of spectrum – high band, or mmWave (24-100GHz), mid band (1-6GHz), and low band (below 1GHz). The higher the frequency, the lower the latency and the quicker the speeds, but the costlier it is to deploy, the shorter the distance it can travel and the easier it is for it to be blocked by objects. High band, or mmWave, is where 5G’s performance gains stand out, and this band cannot be accessed by 4G.
T-Mobile and 5G
Amazon (AMZN, Financial) and Netflix became disruptive companies by offering a superior customer experience compared with the rest of their industry at a competitive or lower cost. T-Mobile has the potential to do something similar with 5G.
T-Mobile began deploying its 5G network nationwide on its dedicated low-band 600MHz spectrum, which now covers more than 308 million people across the U.S. While low band 5G does not provide the speeds necessary to deliver next generation applications, it still provides a material increase in speeds and is widely available. Unlike other carriers, T-Mobile was able to achieve this without taking spectrum away from its 4G customers.
In phase two of the nationwide 5G buildout, the focus has shifted toward the “goldilocks” mid band spectrum, the perfect balance of both speed and coverage. Verizon and AT&T spent a combined $68.9 billion to acquire C-band spectrum (3.7-3.98 GHz) licenses, of which Verizon will have access to 60 MHZ and AT&T will have access to 40 MHz by the end of 2021, having to wait until end of 2023 to use the rest. On the other hand, T-Mobile leveraged its acquisition of Sprint to deploy on the network’s 2.5GHz mid-band spectrum for 20 times faster speeds right away. The C-band spectrum, while offering higher speeds than 2.5 GHz, can only travel shorter distances and is easily blocked by objects.
T-Mobile internal simulations estimate that deploying on C-band will require up to four times more cell sites to achieve the same meaningful coverage that it is able to provide with its 2.5 GHz spectrum. Verizon and AT&T are left with two unpalatable choices – spend much more to provide contiguous coverage, or leave customers in the lurch with poor service and coverage holes. What has made this much worse is that both competitors had to delay the commercial launch of 5G service on C-band spectrum after the FAA issued a warning about potential interference with aircraft altimeters.
The end result is clear to see. T-Mobile recently announced mid-band coverage for 200 million people, over six weeks ahead of its end of year goal, and years ahead of the competition in terms of coverage and depth of the rollout. In comparison, Verizon announced plans to cover 175 million people by the end of 2023, a full two years from now, while AT&T said it expects to cover just 100 million people by early 2023.
T-Mobile and Sprint’s combined low and mid-band spectrum is double that of AT&T and triple that of Verizon. More spectrum equals more availability to build out 5G, while also keeping current 4G subscribers happy. In the meantime, Verizon and AT&T’s spectrum is largely being used up by their 4G networks. In order to complete their 5G rollouts, they will either have to buy more spectrum at auctions, or will turn to dynamic spectrum sharing (DSS) radio technology, which is the ability to ”dynamically” switch between the same 4G and 5G on the same “lane” of spectrum.
The company also has more mm-wave spectrum than AT&T, though not as much as Verizon. While Verizon has the most mm-wave spectrum with the highest current speeds, users can only access that network in the single-digits percentage of the time in the areas in which it's deployed, according to research firm Rootmetrics. T-Mobile's strategy is starting with the most coverage first, before looking to have the highest 5G speeds. At the moment, most people don't even have their first 5G phones yet. Between now and then, T-Mobile should be able to catch up to maximum speed in crowded city centers. That’s because they have the spectrum to do so, and the available capital to deploy it.
As of Jan 2021, over 92% of Americans didn’t have a 5G phone to make use of the billions of dollars that have been invested in building out 5G networks. In typical Un-carrier fashion, T-Mobile has plans to change this too. The company announced a number of initiatives this year, including:
- The Great Free 5G Phone Upgrade, allowing everyone in the U.S. to trade in any mobile phone and get a 5G smartphone for free.
- The Great Unlimited Trade-Up, allowing AT&T and Verizon customers to upgrade to unlimited data with access to T-Mobile’s full 5G Network for the same price or less.
- T-Mobile Home Internet – fixed wireless broadband powered by T-Mobile’s 5G network.
New CEO Mike Sievert put it very succinctly: "We're building the best network at the best value. No one's ever been able to offer that before, the lowest prices and the best network." Thus, as 5G comes on line, we expect the combined T-Mobile-Sprint to continue to take more and more market share above and beyond the roughly 30% market share of the combined companies today.
Sprinting into the future
T-Mobile’s acquisition of Sprint doesn’t just give it an advantage on the spectrum front; the company also benefits merely by bringing Sprint’s 4G customers onto its superior network, which should also lower Sprint’s industry high churn. Even without any of the 5G benefits, T-Mobile should be able to create value, not only with the $7.5 billion in forecasted annual cost synergies by 2023, but also with the revenue synergies from reversing Sprint’s problematic churn numbers.
Back in March 2019, T-Mobile launched a pilot program to deliver home broadband over LTE in select geographies prior to its acquisition of Sprint. Now armed with Sprint's 2.5 GHz spectrum, T-Mobile is offering 100 mbps -- fast enough for all the streaming HD 4K video you'll need -- to 30 million eligible homes in the US, and 90% of the U.S. population by 2024. The service is priced at $60 per month, far lower than the average $80 price for unbundled broadband services today.
As people are cutting the cord on traditional cable, it’s conceivable a majority of households will be broadband/5G only within a few years. T-Mobile can hit that forecast, at NOPAT margins similar to the wireless business at that time, giving a small bump to results five years out.
Sprint is not the company’s only recent major partnership. The company recently announced a new distribution partnership with Walmart (WMT, Financial) that allows shoppers to buy a new phone and activate it on the T-Mobile network at 2,300 of its stores. The partnership gives T-Mobile access to the U.S.’s vast rural hinterland, which represents 40% of the overall U.S. population, without the upfront cost of having to set up its own stores.
Looking to the future, T-Mobile recently helped launch Halo, one of the first commercial driverless car services in the U.S., running on the T-Mobile 5G network in Las Vegas. With Halo, visitors and residents can summon a driverless all-electric Halo, which then arrives at the pick-up location and the rider hops in and drives to their destination.
The company also announced plans to further expand its decade-long collaboration with Google, giving it further access to the Android platform, the most widely used in the world. Initiatives include establishing Messages by Google as the default messaging application for T-Mobile customers on Android smartphones, promoting Pixel devices, using Google One as the phone backup and cloud storage solution and setting up Youtube TV as T-Mobile’s primary TV application.
T-Mobile can grow revenue at a rate of 6% in the base case scenario and expand margins 50 basis points per year, due to operating leverage and better churn from Sprint. This assumption is below the margin expansion T-Mobile achieved in the prior years, but allows for some deceleration to Sprint headwinds. Factoring in synergies from the Sprint acquisition and accounting for spectrum purchases, the combined company can achieve a net oprating profit after tax of nearly $15 billion by 2024.
Applying an enterprise value/Nopat multiple of 25 yields an enterprise value of $375 billion and, assuming all excess free cash goes toward repaying debt, leads to a stock price at least 65% higher than its current level of $115.
No wonder, then, that T-Mobile has witnessed increased activity from the world’s largest hedge funds lately, including Tepper’s Appaloosa Management, Viking Global, Lee Ainslie (Trades, Portfolio)’s Maverick Capital, Clearbridge Value, John Armitage’s Egerton Capital and the "Oracle of Omaha" himself.