EUR 850.00 For Business Accounts Only

Morningstar | We've Increased Our T-Mobile Fair Value Estimate to $76

We’re increasing our T-Mobile fair value estimate to $76 from $73, due primarily to a slightly more favorable view of the firm on a standalone basis. The firm’s cost position has improved markedly over the past five years, but it doesn’t yet earn returns on capital that exceed our estimate of its cost of capital. We expect continued scale gains will enable the firm to steadily improve its returns over the next few years, but several potential developments could derail these efforts over the next decade, limiting our confidence. These views are reflected in our unchanged no-moat and positive trend ratings.

The merger with Sprint, if approved by regulators, would go a long way toward solidifying T-Mobile’s position within a healthier industry structure. We continue to place the odds of regulatory approval for the Sprint merger at 50/50, with our fair value estimate reflecting that weighting. We believe T-Mobile is worth about $70 per share alone and $82 per share if combined with Sprint. We believe Sprint enjoys more upside potential if the deal closes, owing to more favorable deal terms than our standalone fair value estimates would imply. But, we believe the benefits to T-Mobile shareholders are substantial, as well. We also believe T-Mobile faces far less downside risk than Sprint should the deal fail to close.

T-Mobile’s turnaround over the past five years in among the most impressive we’ve seen in the global telecom industry. Since the merger with MetroPCS closed in 2013, the firm has masterfully integrated the two businesses, pursued additional high-quality spectrum, and deployed new wireless technologies. As a result, its network performance has improved dramatically, providing both better geographic coverage and capacity, meeting a higher proportion of customer needs in more places. Paired with network improvements, the firm has marketed its services brilliantly, in our view, carving out a position in opposition to other providers as the “uncarrier.” Unique service offerings that remove perceived customer pain points without dramatically changing the economics of the business have bolstered this market perception.

Even with its enhanced scale, however, T-Mobile trails AT&T and Verizon by a wide margin: these rivals’ retail customer bases are roughly 40% and 65% larger, respectively. Given that T-Mobile generally prices its services at a discount to its larger rivals, it is set up to deliver inferior returns on capital. While T-Mobile’s margins and cash flows have improved dramatically as it has grown, it still doesn’t have the resources to fully control its fate, in our view. If the next evolution of wireless technology ultimately requires significantly higher investment in spectrum and equipment, T-Mobile may struggle to keep pace.