Unlike many other companies, T-Mobile US (TMUS 0.57%) had a successful year in 2022. While the S&P 500 index dropped roughly 20%, T-Mobile's stock increased 20%, attracting investors with its strong subscriber growth and positive outlook for its 5G plans.
However, in 2023, T-Mobile's stock has declined 5% year to date, while the S&P 500 index has increased 10%. Has T-Mobile lost its mojo, or is this an opportune time to buy? Here's what is holding the stock back in 2023 and why it is still a long-term buy.
The Sprint acquisition is a home run
T-Mobile had several motives for acquiring Sprint in 2020. First, the merger provided T-Mobile access to Sprint's 5G spectrum assets, a vital resource to build and maintain a high-quality network.
Although T-Mobile's network was already good, adding Sprint's spectrum created North America's best 5G network. For example, the company consistently wins top rankings for the best 5G reliability, speed, and coverage from umlaut, Opensignal, and Ookla (companies that provide analysis of the wireless industry).
Second, by accessing Sprint's existing market, T-Mobile has significantly increased its customer base. This strategic move has enabled T-Mobile to emerge as a fierce wireless industry competitor, standing shoulder to shoulder with established players such as AT&T and Verizon.
Furthermore, T-Mobile is taking mobile phone market share from its competitors. In the first quarter of 2023, it saw a gain of 538,000 postpaid phone subscribers, while AT&T gained 424,000 and Verizon lost 127,000. Additionally, it continues to dominate in high-speed internet customer additions, outpacing the combination of AT&T, Verizon, Comcast, and Charter for the fourth consecutive quarter.
The third benefit of this merger is that it provided the new T-Mobile with the resources to roll out 5G nationwide faster than Sprint or premerger T-Mobile could have done independently. As a result, it is building out its 5G infrastructure faster than AT&T and Verizon. In addition, T-Mobile should be the first wireless provider to enable new services and applications, such as self-driving cars, virtual reality, and augmented reality.
Last, the company is gaining significant operating cost savings from the merger. During its first-quarter 2022 earnings call, management said they aimed to achieve $7.5 billion in run-rate operating cost savings from the union in 2024. However, the company is about a year ahead of schedule. It now expects to reach between $7.3 billion to $7.5 billion in 2023, and it has recently increased its 2024 cost savings goal to $8 billion.
Decreasing operating costs lead to growing profitability. Moreover, when a company reduces operating costs, it has more money to invest in new growth opportunities or return cash to shareholders through dividends or share repurchases, leading to higher stock prices and increased shareholder value.
What's holding the stock back in 2023?
At the time of the Sprint and T-Mobile merger, Sprint was majority-owned by SoftBank, and T-Mobile was majority owned by Deutsche Telekom. One sticking point with the deal closing was that Sprint's value had deteriorated over the time the government took to approve it, skewing the post-deal percentages of the respective Softbank and Deutsche Telekom ownership unfavorably for the German telecom company.
According to CNBC's sources, SoftBank and Deutsche Telekom decided not to adjust the common shareholder exchange ratio to fix the problem to avoid delaying the deal's closing. Doing so would have required a new shareholder vote and added months to the process.
Instead, SoftBank agreed to increase Deutsche Telekom's ownership stake slightly while giving up some T-Mobile shares. However, SoftBank can reclaim its original T-Mobile share percentage if the merged company's 45-day average stock price reaches $ between 2022 and 2025, diluting existing shareholders.
This chart shows that the stock has experienced difficulty sustaining its price above $150 -- indicating some major investors sell it every time it goes above $150 to avoid dilution.
However, the company's outstanding financial performance should help it surpass the $150 mark, even with the dilution. Moreover, SoftBank, Deutsche Telekom, and T-Mobile could eventually renegotiate the arrangement and eliminate the dilution problem. Therefore, the dilution effect resulting from the merger is only temporary and should not deter long-term investment in the stock.
Should you buy T-Mobile stock today?
The market has awarded T-Mobile a price-to-earnings (P/E) ratio of 45, higher than the S&P 500's P/E ratio of 25 and a premium to its U.S. competitors, as seen in the chart.
TMUS PE Ratio data by YCharts
Bullish investors believe the stock deserves the premium due to its heavy investment in areas that should pay off significantly, like the network infrastructure underlying new markets such as home internet, 5G, and the Internet of Things.
Therefore, its formidable competitive position in the wireless industry and potential for future revenue and profit growth justify an investment in T-Mobile stock today.
