T-Mobile (TMUS 0.36%) has been the little engine that could, an underdog. Once expected to disappear, it's now become the driving force in the wireless space.
The company is still the third largest carrier by number of subscribers, but it has tremendous momentum. T-Mobile added 8.2 million subscribers in 2016, marking the third straight year it's topped 8 million new customers. That's the most in the industry by far, and it's fair to say the company, led by CEO John Legere, has changed how the overall wireless space operates.
Frontier Communications (FTR), on the other hand, has produced a less positive story. The company spent $10.54 billion buying 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS video subscribers in California, Texas, and Florida (CTF) from Verizon (VZ -1.40%) in a bid to become a bigger player, and so far that move hasn't worked out. The company has lost customers overall in all three quarters since the deal closed, and while CEO Daniel McCarthy has said he expects that trend to stop, he hasn't shown any evidence that it will.
These are two companies going in opposite directions. T-Mobile is on the rise, while Frontier has stumbled mightily. Going forward, however, there are opportunities for both. The question is whether there's any reason to believe T-Mobile will stop its rise or if Frontier will turn around its steady subscriber loss.
The case for Frontier
The only argument that can be made for the beleaguered internet and cable company is that it will reverse its subscriber loss. McCarthy believes the company is finally positioned to do that, though he's made similar promises after Q2 and Q3, the first two quarters the company owned the CTF properties.
After blaming the poor customer counts in Q2 and Q3 on suspended marketing efforts as the company took possession of the CTF accounts, McCarthy blamed Q4 woes on purging acquired account holders who weren't paying their bills. He made it clear during the Q4 earnings call -- transcribed by Seeking Alpha (registration required) -- that aside from what he called "account cleanup," the underlying trend has improved.
"We began to see improvements toward the back end of the quarter, as our operational performance accelerated and our marketing offers began to penetrate to targeted communities," he said. "We expect these trends to improve further due to the aggressive offer we recently launched and the improvements in key distribution channels we will be launching toward the beginning of the second quarter. We expect our net additions on key metrics in the CTF markets to continuously improve through the remainder of this year and expect to return to market share growth in the second half of the year."
If that happens, Frontier stock should strongly recover, because the company has delivered on its promise to operate more efficiently once it had the CTF properties. It has delivered annual savings of over $1 billion, with an expectation of getting close to $1.5 billion in the coming years.
The case against T-Mobile
Based on its past few years, the only argument you can make against T-Mobile is that its growth may someday level out. That could happen in the coming year partly because rival carriers have copied the company in many ways. The other three major carriers now all offer unlimited data and no contracts and have largely eliminated overages. That could mean that even though AT&T and Verizon still charge more than T-Mobile, they may be able to slow their upstart rival's growth by offering a similar product on networks that some consumers perceive -- largely unfairly, based on current data -- as being superior.
Were that to happen, in theory T-Mobile's stock would cool off. Of course, both companies are unlikely to make major price cuts, and T-Mobile has constantly found new ways to be different in a customer-friendly sense. The other players in the wireless space generally have to play catch-up.
Which is a better buy?
Frontier may well stop, or even turn around, its subscriber problems, and that could send its beaten-down stock much higher. Anyone buying shares now would get in at a low point, with perhaps greater short-term growth prospects than T-Mobile.
Still, even though McCarthy wants you to believe that everything's rosy, Frontier is still a small fish in a big pond. It's a secondary provider in all of its markets, and it has to face newly aggressive, larger rivals, as well as other alternative services, not to mention pay-television, cord-cutting, satellite, and a drive toward skinny bundles.
McCarthy has proved he can run his company efficiently, but it's hard to see significant growth, given the opposition Frontier faces. T-Mobile, on the other hand, has a significant track record of being able to not just take on giants but also embarrass them while doing it. The company has shown no sign that its momentum will flag, and its recent deal to buy $8 billion in new spectrum should help it fight any of its rivals' attempts to disparage its network.
Frontier is a bigger gamble, and bigger gambles do often come with huge rewards -- but you have to weigh those against the significant risk you're taking. T-Mobile is, at least right now, the better company, the one that should continue to post solid growth every quarter, pushing its stock steadily higher. That's not as sexy as the possibility Frontier makes a huge comeback, but T-Mobile's continued success is a better bet, making it the better buy.