With T-Mobile's (NASDAQ:TMUS) shares down 15% over the past 12 months, the market is presenting investors with an entry point. That's because there are a number of catalysts that could help the wireless carrier rebound to new highs in the coming year. Specifically, here are three reasons why you may want to consider buying T-Mobile stock today.
1. Industry-leading customer growth
The first quarter of 2018 marked the 20th consecutive quarter T-Mobile added more than 1 million net customers, and its 17th straight quarter of industry-leading growth.
The company continues to disrupt the massive U.S. wireless industry, with unconventional moves like offering only unlimited plans, and eliminating contracts and overage charges. Innovative promotions -- such as including free Netflix subscriptions with its family plans -- further fueled its growth.
These "Un-Carrier" tactics helped T-Mobile surpass Sprint (NYSE:S) to become the third-largest U.S. wireless carrier. Now, the hard-charging company has set its sights on closing the gap between itself and industry titans Verizon and AT&T.
To do so, T-Mobile is aggressively investing in its wireless network. It purchased $8 billion of low-band spectrum to strengthen and expand its LTE network so as to be able to "compete in every corner of the country."
These investments are boosting coverage and download speeds, as noted by CEO John Legere during the company's fourth-quarter earnings call:
OpenSignal, the global standard for measuring consumers' real-world mobile network experience, named T-Mobile as the winner in 5, count them, 5 categories in their recent report. Nearly 6 billion tests from actual customers of every major wireless network shows that T-Mobile's network is the fastest in the industry, and that T-Mobile customers get an LTE signal more often than AT&T, Sprint, and even Verizon.
Between its Un-Carrier strategy and its arguably best-in-class network, T-Mobile is giving consumers a strong incentive to switch -- and they're doing so. The carrier expects to add 2.6 million to 3.3 million net new customers in the year ahead.
2. Surging cash flow
These robust subscriber gains are helping to drive T-Mobile's revenue and profits sharply higher. Revenue rose 8.8% year over year to $10.5 billion in Q1, while adjusted EBITDA increased 10.8% to $3 billion.
Better still, that rapidly expanding customer base is fueling bountiful cash flow production. The company expects to generate annual free cash flow of $4.5 billion to $4.6 billion by 2019, which would represent a 3-year compound annual growth rate of 46% to 48% from 2016 to 2019.
This allows T-Mobile to invest in growth while also returning cash to investors via share repurchases, which should amplify EPS gains and drive its stock price higher.
3. A pending merger with Sprint
As can be seen, T-Mobile is doing just fine on its own. Yet management is looking to accelerate its surge toward being comparable in size with the U.S. wireless industry leaders by merging with Sprint.
Sprint and T-Mobile have tried to unite on two prior occasions, but concerns that regulators were poised to block those deals scuttled them. However, under President Trump, who is widely viewed as being less concerned about antitrust and anticompetitiveness issues, a deal may actually get done this time.
The proposed merger deal values the combined company at about $146 billion, compared to the approximately $200 billion values currently placed on each of its two larger rivals. According to Strategy Analytics, the formidable new company would have approximately 126 million customers, compared to 150 million for Verizon and 142 million for AT&T.
At that scale, a combined T-Mobile/Sprint would be able to produce much higher profit margins than either company could alone, driven in part by an estimated $6 billion in annual cost synergies. And T-Mobile would eliminate a rival that's historically been aggressive in terms of discounting. Thus, the combined company would likely be able to offer fewer promotions, which could further boost margins.
Moreover, the merged entity would be able to make better use of Sprint's valuable spectrum holdings, as its stronger cash flow would allow it to more quickly deploy these assets. In addition, it would possess a larger network of retail stores, which T-Mobile has identified as an important growth driver.
Perhaps most interestingly, the two companies say that if they're allowed to merge, they'd be able to "build the first broad and deep nationwide 5G network." That would boost their ability to profit from the explosive growth of the Internet of Things, and further strengthen their competitive position.
Despite the change of administration in Washington, it's still unclear whether regulators will sign off on this merger, so these potential benefits may not materialize. Even without such a deal, however, T-Mobile would likely continue to grow its subscriber count and free cash flow at industry-leading rates. And with its stock trading at only about 10 times its expected 2019 free cash flow, T-Mobile's shares are quite a bargain. Long-term investors may wish to consider buying some T-Mobile stock today.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.