T-Mobile (TMUS -0.92%) has just completed its takeover of Sprint. Between this merger and its massive investment in 5G mobile technology, T-Mobile has become one of only three companies launching a 5G network across the U.S.
Long an emerging player in the wireless industry, T-Mobile stock saw massive gains as the telco cut prices and gained market share during the 3G and 4G eras. Now, this rising star has become more of an established player.
However, this emergence has come at a high cost, and these burdens could spell the end of T-Mobile as a high-growth stock. These are the three reasons why.
1. Earnings increases will probably slow
To be sure, T-Mobile has become a growth stock in a slow-growth industry since launching its IPO in 2007. The company initiated price wars and steadily gained market share. In the last 10 years alone, T-Mobile stock has risen by nearly 1,000%. It dramatically outperformed its two main competitors, Verizon (VZ -1.03%) and AT&T (T -0.99%). Now that the company has finally completed its takeover of Sprint, more investors will likely see it as an established player.
Unfortunately, the future may look less bright for T-Mobile stock. Analysts predict a 36.8% decrease in profits for the current year, followed by an 18.1% decline in fiscal 2021. Over the next five years, they forecast average annual earnings growth of 3.9%. Admittedly, this growth rate comes in higher than both Verizon and AT&T.
2. Less attractive financials
However, it also represents a dramatic slowdown from the 48.8% average yearly profit increases of the previous five years. Moreover, at a forward price-to-earnings (P/E) ratio of approximately 23.2, its valuation is dramatically higher than Verizon's forward multiple of around 11.7 and AT&T's forward P/E of about 9.8.
Furthermore, both Verizon and AT&T offer dividends, and large ones at that. The average dividend yield for the S&P 500 is just under 2%. Yet Verizon and AT&T offer yields of just under 4.5% and around 6.8%, respectively. Both payouts also have long track records of annual increases.
Conversely, T-Mobile has yet to provide its investors with a dividend. Between anemic growth and the lack of a payout, investors have little obvious incentive to pay T-Mobile's higher multiple.
3. Less ability to initiate price wars
Moreover, T-Mobile built its market share on lower pricing. Nonetheless, the development cost of 5G may make that strategy unworkable in the future. Its long-term debt of around $22.95 billion is relatively modest compared to both Verizon and AT&T.
However, with only about $1.11 billion in cash, the company has relatively little flexibility. After completing the merger with Sprint, it also assumed the company's debt. Sprint's long-term debt stood at $33.03 billion as of the fourth quarter of 2019. It was likely not a coincidence that the company announced the sale of $19 billion in senior secured notes the day after completing the merger.
T-Mobile also pledged to invest $40 billion in its network over the next three years, unleashing at least $43 billion in value to shareholders, according to company estimates.
Still, $40 billion is a significant capital expenditure. Also, that does not include the capital expenditures of past years needed to build the existing network. T-Mobile spent $6.21 billion in property and equipment in the previous four quarters.
The path forward
Considering the slowing profit growth and the increasingly large debt burden, another 1,000% increase in the stock price is unlikely. However, its status as one of only three 5G companies will hold it in good stead. Investors should also consider that 5G will mean that T-Mobile will pursue new lines of business. Some of these innovations may not yet exist. Hence, we do not yet know how far 5G will take T-Mobile.
Still, now that it has become established, I would look for the company to initiate a dividend payment. With falling profits in the near term, T-Mobile stock may need a payout to avoid getting ignored in favor of telecom stocks such as Verizon and AT&T.
As one of three 5G companies, T-Mobile should prosper over the next few years. However, T-Mobile stock may need to change for investors to share in that success.