It is a well known fact that the United States has a huge wireless market. Just to give you an idea, as of April, 2014, population in the U.S. was over 317 million and the number of cellphones in use exceed 327 million, according to data from CTIA The Wireless Association. Last year, smartphone penetration rate in the country reached over 74%.
Hence, being among North America’s top wireless operators undoubtedly means boasting an important position in the telecommunications world. T-Mobile US, Inc. (TMUS, Financial) is number four. The company, which formed through MetroPCS’s acquisition of Deutsche Telekom AG (DTEGY, Financial)’s T-Mobile US unit in 2013, has 47 million subscribers. It follows larger rivals Verizon Wireless, a wholly owned subsidiary of Verizon Communications, Inc. (VZ, Financial), AT&T, Inc. (T, Financial) and Sprint Corporation (S, Financial).
Market Positioning
T-Mobile holds a privileged position as one of only four nationwide wireless providers. The company has valuable assets that would be extremely difficult to replicate by new entrants. As a result of its merger with MetroPCS, it now owns large contiguous blocks of spectrum in the PCS and AWS bands, which have significantly boosted its network capacity. Further, the firm enjoys solid brand recognition and an established customer base comprised of roughly 22 million postpaid and 25 million prepaid customers.
A Costly Growth
T-Mobile came out of the merger with greater network and spectrum capabilities and a 12% share of the wireless market. In order to drive growth, in late 2012 the firm undertook several initiatives to improve its postpaid business, which resulted in 2 million postpaid subscriber additions in 2013.
Its better position in the marketplace, however, is not coming cheap. The firm has done away with carrier contracts and is investing heavily on marketing, which has hurt its margins. Its advertising expenditures per retail customer are 40% higher as Verizon’s, and with MetroPCS remaining a distinct brand, supporting the T-Mobile brand nationwide will not gain the firm the benefit of scale.
As a matter of fact, in last years’ final quarter T-Mobile posted a $20 million loss, a significant increase in relation to the $8 million loss reported the year before.
Competitive Pressure
In 2013, T-Mobile started reversing the huge customer losses of the previous two years. In 2008, the firm had 40% as many postpaid customers as Verizon Wireless and 45% as many as AT&T. Although subscription rates have boosted, the firm is still far from reaching the former percentages, presently showcasing a 23% and 31% respectively.
The main reason why resuming growth has become a difficult task for T-Mobile is that the company is far smaller than its rivals AT&T and Verizon, and the difference in scale puts it at a disadvantage when it comes to costs. In turn, its capital spending represents 18% of its service revenue, against 14% at Verizon Wireless and 15% at AT&T’s wireless unit.
With the aim of creating a more viable competitor to the two telecom giants, Sprint’s chairman Masayoshi Son manifested in a recent TV interview his intention to acquire T-Mobile. The deal is still to be defined and it will likely face heavy scrutiny from regulators.
Valuation
T-Mobile stocks trade at 588.2 its trailing earnings compared to the industry median of 18.2. Although the firm showcases a revenue growth of 16.4 against its rivals’ average of 3.30, its return on equity is just 0.3 compared to the median of 12.53 and its earnings per share growth posted a negative -64.20% against its peers’ average of 1.50%.
Investment guru Michael Price (Trades, Portfolio) recently sold out his holdings in the company following my bearish feeling about T-Mobile’s growth prospects.
Discloosure: Patricio Kehoe holds no position in any stocks mentioned.
