Is T-Mobile Worth More?

With once struggling domestic wireless provider T-Mobile US  (NYSE: TMUS  ) now worth over $26 billion, investors should wonder if the stock has any value left. The company is rumored to be a buyout target of Sprint  (NYSE: S  ) , yet its quick rise from $7.50 to nearly $33 in a span of two years should raise valuation questions.

On the backs of wireless mergers, including its own consolidation with Metro PCS, T-Mobile is now secure in a strong fourth position of the domestic wireless market. The stock now trades at nearly 1 times revenue estimates, suggesting that all of the easy money has already been made. Further, notable investor firm Omega Advisors exited its position during the first quarter further, questioning if the stock has upside value.

A rally that has run its course?
Some reputable media outlets have rumored a $40 price tag for T-Mobile shares from a Sprint offer, but the stock is noticeably lingering around $33. Considering the vast regulatory risk, debt concerns, and recent stock gains, investors will probably want to see the cash before bidding up the stock any further.

The AT&T (NYSE: T  ) deal to purchase DirecTV is a prime example of how a merger facing regulatory concerns isn't going to obtain a premium price in the market. Owning the stock has some prime risks including the deal being blocked, and time decay due to how long it could take to complete a deal. In the case of the DirecTV deal, investors are offered $95, or nearly 10% above the current price, but the deal could take up to a year to close.

Not-so-profitable growth
Absent a merger, the biggest issue faced by T-Mobile investors is that growth isn't exactly profitable. The wireless provider added 1.3 million postpaid customers and 2.4 million net additions during the first quarter, yet its EBITDA plunged 12% sequentially due to the strain of customer growth. However, analysts forecast the company reaching profitability this year, though the numbers continue to decline following the weak first-quarter numbers.

For its part, AT&T is partially buying DirecTV to expand further into the pay TV business to bundle services and diversify away from the sudden price wars in the wireless sector. A couple of weeks back, analyst Walter Piecyk of BTIG warned that AT&T could face a 10% decline in average revenue per user in the second half of the year. The potential decline is mainly due to the company responding to aggressive moves from T-Mobile by cutting prices and removing phone leasing requirements for shared mobile plans.

Bottom line
With the regulatory issues and ongoing price wars, investors should wonder if T-Mobile's stock has peaked. Any proposed merger with Sprint would face substantial regulatory concerns, while T-Mobile continuing as an independent company is likely to face margin pressure preventing the company from reaching the substantial profit growth forecasted for 2015. In the end, if Sprint does eventually capture T-Mobile, AT&T is still a better investment with a 5% dividend yield and the benefits of bundling pay TV services from DirecTV with reduced pricing pressure.

Sprint might think T-Mobile is worth more, but shareholders aren't likely to see any gains during an expected lengthy regulatory review, and investors face downside risk from a failed merger along with a weak profit profile.

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