Cable companies are taking a greater share of U.S. wireless subscribers, but T-Mobile (TMUS 0.29%) doesn't have a problem with that.
Comcast (CMCSA 3.20%) and Charter Communications (CHTR 3.36%) combined to add nearly 1 million mobile subscribers in the fourth quarter. That was good for more than half of the entire wireless industry's net additions. At a recent investor conference, T-Mobile CFO Peter Osvaldik said he expects industry postpaid phone net additions to decline in the first quarter, "and we anticipate in that context that cable will actually have more of a share of net adds."
But he doesn't see cable's current growth as a major issue for T-Mobile. And as long as it's executing on its goals of growing profitability and free cash flow, investors should be very happy owning the stock.
Where is all this growth coming from?
The wireless industry is practically saturated, so when the cable companies grow subscribers, someone else must be losing subscribers.
It's not T-Mobile. The carrier added 927,000 postpaid phone subscribers in the fourth quarter and eked out an additional 25,000 prepaid subscriber additions. Postpaid subscribers, who pay their bill after receiving service, are generally considered the most valuable in the industry. Prepaid subscribers, who pay their bill before receiving service, are more likely to cancel service and switch from one carrier to another.
Osvaldik suggested a lot of the growth at Comcast and Charter is coming from customers switching from prepaid plans to postpaid plans. He also called out Verizon as a major contributor to cable's wireless subscribers . Indeed, Verizon lost 175,000 prepaid subscribers in the fourth quarter, and it struggled to add phone subscribers throughout 2022.
But Osvaldik was keen to point out one big reason Charter, in particular, was able to outperform subscriber expectations. Last quarter, Charter introduced a promotional offer called Spectrum One. Customers signing up for broadband internet would be eligible for a free wireless line for 12 months, or, as Osvaldik put it, "dropping free lines into everybody's bags as they walk out the door on an exploding promotion." Comcast copied the Spectrum One offer last month with its own limited-time offer.
NASDAQ: TMUS
Key Data Points
Short-term gain, long-term pain
Osvaldik sees two problems with the cable company's wireless subscriber growth.
First, they're creating "a future churn event for customers," he says. "We've seen this play out in the industry before." When customers sign up for a service at a promotional rate, churn rates are notably much higher when the promotional pricing ends. After 12 months, Spectrum One subscribers will see their monthly bill more than double for home internet and mobile service.
Second, Osvaldik doesn't believe the plan is profitable. He points out that Charter's average revenue per user (ARPU) declined 12% year over year for its wireless business. That's a symptom of price cuts from its promotional offer.
Comcast's new offer may not have as deleterious of an effect on its ARPU numbers, considering it's not structured quite the same way . The offer is only available to new subscribers, and it's effectively offering a small discount on a wireless line when bundled with a new low-priced home internet plan. Still, the offer is designed to promote subscriber growth in the near term at the cost of profits and sustainability.
T-Mobile is executing on its goals
Despite the noise caused by Comcast and Charter, T-Mobile continues to hit its goals on profitability and free cash flow.
Last quarter, T-Mobile led the industry in service revenue to free cash flow conversion. That came as a result of growing its service revenue 8% year over year through a combination of subscriber growth and an improvement in ARPU. The latter came from selling customers into T-Mobile's highest-tier plan, Magenta Max.
Management expects free cash flow to grow 75% year over year in 2023, thanks to continued revenue growth and lower capital expenditures. It's also expecting adjusted EBITDA growth of 10% for the year at the midpoint of its guidance, which increased from its analyst day in 2021.
In other words, T-Mobile continues to hit its goals. The impact of cable in the short term may mean fewer net additions for the carrier, but it appears to be hurting its competition much more. In the long run, T-Mobile looks poised to rapidly grow its free cash flow while producing strong profits for investors. That makes it one of the best communication stocks to buy today.
