There aren't many tech stocks that are up on the year, as the Nasdaq is down 21.6% through April -- the worst start to a year on record!
But don't tell that to T-Mobile (TMUS 0.25%), which is up a handy 6.2% on the year, even after a rough 6.9% drop on Friday.
However, that drop came at the end of an otherwise positive week, in which T-Mobile beat analyst expectations on its first quarter earning report on Wednesday. Despite Friday's subpar performance, T-Mobile seems like a defensive stock that will allow investors to sleep well at night through a tumultuous market.
Another beat and raise
In the first quarter, T-Mobile delivered another quarter of strong growth, at least by telecom industry standards. T-Mobile grew total accounts by 348,000, postpaid customers by 1.32 million, and postpaid phone net adds by 589,000. Postpaid phone churn declined by five basis points, from 0.98% to 0.93%. Also encouraging, T-Mobile's new high-speed wireless broadband offering grew by 338,000 customers, reaching 984,000 broadband customers total -- pretty quick for a product that was only launched widely one year ago. These strong additions led to service revenues growing 6.6% year-over-year, with core adjusted EBITDA up 10.2%, and free cash flow up 26.2%.
The solid results prompted management to raise its full-year guidance for net additions and EBITDA. Furthermore, T-Mobile thinks it can increase the synergies it will reap from integrating assets acquired in the Sprint acquisition two years ago. So despite increasing its capital expenditures by $100 million to speed up the company's 5G buildout in 2022, management still raised free cash flow guidance by $50 million.
Solid growth and even better profitability are key attributes investors are seeking today, especially as interest rates rise.
T-Mobile's 5G lead and merger synergies are beginning to bear fruit
This year, T-Mobile will substantially transition all Sprint customers over to the T-Mobile network. The Sprint customer base was on a different technology, and Sprint customers have historically churned at the highest rate in the industry. Once they are substantially transitioned off the network and onto T-Mobile, however, T-Mobile's churn should go down and its net additions should increase. On the conference call with analysts, CEO Mike Sievert said that if the Sprint customers were churning at the rate of T-Mobile's Magenta plan customers, postpaid net phone adds would have been 900,000, which would have beaten this quarter's leader, AT&T (T 0.07%), which added 691,000 postpaid phone customers.
Once all the Sprint customers are transitioned over to T-Mobile's network, T-Mobile can de-commission towers, which will lead to even more cost savings. T-Mobile has only de-commissioned one-third of the 35,000 sites it had targeted, but it should finish the decommissioning by year-end. Substantially all of T-Mobile's integration work will therefore be complete by the end of the year, after which the company should start a share buyback program.
This difficult economic environment could benefit T-Mobile
During the 4G era, T-Mobile was known as the value offering compared to incumbents in the telecom industry. That's a little bit muddied now, as cable companies have also begun to bundle low-cost mobile plans with high-cost broadband. However, T-Mobile is also now attacking the cable market, as evidenced by its small but rapid wireless broadband products, which are cheaper than fiber or coaxial alternatives. So each is honing in on the other's turf.
What's different now though is that T-Mobile now has a clear network lead in terms of 5G coverage, especially when measured by all-important mid-band spectrum. Mid-band offers perhaps the most relevant trade-off between speeds that are markedly higher than 4G, but also with enough range for people to access it easily.
T-Mobile currently has a two-year lead in mid-band deployment, covering 225 million people, with plans to get to 300 million by the end of 2023. Verizon (VZ -0.43%) and AT&T don't plan to get to 250 million covered with mid-band until the end of 2024. So this is a change from the 4G era, when T-Mobile was a network laggard.
Management also noted 45% of its postpaid customer base is now on a 5G phone. The 5G transition therefore is now just hitting its stride. As a majority of the U.S. population gets a 5G phone over the course of this year, T-Mobile's leading network could attract more and more switchers -- especially those now worried about their monthly costs.
While 2022 looks to be a tumultuous year for the economy and tech sector, T-Mobile's value proposition, accelerating profitability, and the initiation of a share buyback could help it defy the bear market.