You know T-Mobile US (TMUS 1.45%) and AT&T (T 2.46%) as two of the largest wireless network operators in North America. They may look similar at first glance, but they are very different from an investor's point of view. I'm here to show you how AT&T differs from T-Mobile, and then to explain which one makes the better investment today.
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Good old Ma Bell
AT&T isn't the pure-play bet on wired and wireless telecommunications that it was just a few years ago. The company widened its business model with the acquisitions of satellite TV broadcaster DirecTV in 2015 and media conglomerate Time Warner in 2018.
It's a dramatic change. In 2014, before the company's $135 billion buyout spree, wireless revenue accounted for 56% of annual sales, and wireline operations contributed the remaining 44%. In AT&T's buyout-boosted business model, traditional telecom services accounted for 53% of the first quarter's total revenue while various entertainment operations contributed 46% to the top line.
Don't get me wrong -- AT&T is still a leading telecom with 156 million subscribers as of March 31. It's just that the mobile service business can't depend on consumer-driven growth anymore. Postpaid contracts fell 1.1% year over year in the first quarter, landing at 76.6 million subscribers. Sure, the company added 1.5 million prepaid lines and a whopping 13 million connected devices over the same period, but those come with lower fees and slimmer profit margins. AT&T's mobile revenue increased by a mere 1.2% in the first quarter.
Big Magenta
T-Mobile is a very different story. The company may not have announced a new policy under the "uncarrier" moniker since early 2017, but T-Mobile continues to focus on mobile growth in an unconventional manner.
This company's top-line sales are generated exclusively by wireless subscriptions, adding up to 81.3 million lines at the end of March. T-Mobile still plays a distant third fiddle to AT&T and Verizon (VZ 1.31%) in terms of branded monthly subscriptions, stopping at 37.9 million accounts in that premium category. But Magenta is stealing postpaid subscribers from its main rivals, adding 3.2 million names over the last four quarters. A 10% year-over-year increase in T-Mobile's total subscriber counts lifted its total first-quarter sales by 6%.
What's next?
I can't say that AT&T isn't trying anything new, as the telecom giant pivots hard into the entertainment industry as we speak. The new WarnerMedia asset is providing some much-needed organic growth and profitability, though DirecTV is struggling with the secular cord-cutting trend. The company is reshaping itself in several ways, inching further and further away from the telecom industry.
Meanwhile, T-Mobile delivers reliable subscriber growth without sacrificing its profit margins. The company hopes to acquire struggling rival Sprint (S +0.00%), which comes with a fading subscriber base but plenty of useful radio spectrum. Closing this deal is a do-or-die for Sprint but no more than a quick growth-boosting idea for T-Mobile. With or without Sprint's assets, T-Mobile looks likely to continue stealing subscribers from its rivals in the premium postpaid category.
One of these stocks is more expensive than the other. T-Mobile's shares trade at 21 times trailing earnings against AT&T's miserly 13, but for good reason. With AT&T, you're investing in a fading industry giant that's desperately pulling out all the stops to find some sort of sustainable growth for the long run. In T-Mobile, you'll get a proven growth engine that is reshaping the mobile market on its own -- with the added bonus of another jump-start if and when the Sprint merger closes.
T-Mobile is the clear winner in this matchup. I'd much rather own a growing iconoclast than a drowning giant.
