Why T-Mobile US Inc. Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of T-Mobile  (NYSE: TMUS  ) held on to a gain of over 6% in afternoon trading after rising 10% shortly after Wednesday's closing bell. Investors are optimistic about the company's impressive subscriber growth, and also appear to be reacting to news that rival mobile carrier Sprint (NYSE: S  ) might be preparing a buyout bid for T-Mobile.

So what: T-Mobile added 2.4 million new subscribers in its first quarter, bringing the company's subscriber count up to 49.1 million. This was the fourth consecutive quarter in which T-Mobile gained more than 1 million new subscribers. However, barely more than half -- 1.3 million -- of those new subscribers have an ongoing monthly plan. Investors were willing to overlook the steep losses T-Mobile is piling up to gain these subscribers; the company recorded a loss of $151 million for the quarter, compared to a $20 million loss in the preceding quarter, despite improving its top line by 47% year over year to $6.9 billion. T-Mobile's quarterly average revenue per user also slipped 8% year over year to $50.01.

Now what: "Users at any cost" is a strategy that has undone many companies, but investors are either willing to overlook it today or have instead decided to focus their optimism on a potential tie-up with Sprint. These two telecoms continue to lag far behind the big two, and consolidation might be the only way for them to compete over the long term. T-Mobile CEO John Legere pointed out during the company's earnings call that "at some point, in terms of the industry, it's a consolidation game," lending more credence to the rumors that Sprint and T-Mobile will come together in the future. However, T-Mobile's shares have nearly doubled in the past year, and its upside -- even when combined with Sprint -- may be somewhat limited given that the company has no dividend and no clear strategy for a return to strong profitability.

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