Many investors see T-Mobile US (TMUS -0.06%) as the upstart wireless company seeking to compete with tech giants. So does T-Mobile management. As low prices and acquisitions helped the company gain market share with customers over the past decade, T-Mobile stock became increasingly popular with investors.
That popularity among users and shareholders helped the telecom stock produce market-beating returns since its initial public offering (IPO) over 10 years ago. Even with its strong gains, there is still a sense that T-Mobile has further growth potential to tap into thanks to an approach that positions the company well relative to its main rivals. Let me explain.
T-Mobile's growth
Now chairman of Trilogy Partnerships, a private equity fund, John Stanton founded T-Mobile back in 1994 and called it VoiceStream Wireless at the time. It took the T-Mobile name when Deutsche Telekom bought a plurality stake in the company in 2002. However, it was not directly available to average investors as a stock until T-Mobile bought MetroPCS in April 2013. MetroPCS was public at that time, and through a reverse takeover, the combined company launched an IPO on May 1, 2013.
Investors who bought $10,000 worth of the stock that day would have more than $92,340 today. Conversely, its two main peers, Verizon Communications (VZ 1.17%) and AT&T (T 1.02%), experienced losses on a $10,000 investment over the same period.
Of course, all three companies pay out dividends (T-Mobile's only began recently), so the return involves more than just price. But even factoring in dividends reinvested, T-Mobile's total return since May 1, 2013, far outpaces its two main rivals.
TMUS Total Return Price data by YCharts.
T-Mobile vs. its peers
Investors should also remember that T-Mobile started as a wireless carrier. This starkly contrasts Verizon and AT&T, which began as Baby Bells following the breakup of the original AT&T and were primarily landline service providers.
These companies began to offer wireless services in the 1980s. Nonetheless, such services began at a high price point and attracted few customers initially. Thus, for much of their history, most of Verizon's and AT&T's revenue came from landlines and, later, fiber-related internet and TV offerings.
Without such infrastructure, T-Mobile did not have these legacy costs nor the ongoing pension obligations that drew employees before T-Mobile existed. Nor does it now face possible litigation from lead cables installed decades ago the way that AT&T and Verizon currently do. This gave T-Mobile a financial advantage and freed the company to try new approaches.
Over time, it gained market share by charging lower prices, thus squeezing competitors' margins. It also made notable acquisitions, such as MetroPCS and (more recently) Sprint.
How differing strategies affected the stocks
Due to T-Mobile's different approach, investors appear to view it more like a growth stock and have priced it as such. That may explain how T-Mobile stock grew as its peers lost traction.
Another factor was dividends, which T-Mobile did not offer until recently. Indeed, T-Mobile will now pay shareholders $2.60 per share annually. But at a dividend yield of about 1.75%, dividend returns will significantly lag those of its peers, both of whom offer dividend returns of around 7%.
However, investors should remember that T-Mobile's growth comes at a premium. With a price-to-earnings (P/E) ratio of 24, T-Mobile may not appear particularly expensive. But with both AT&T and Verizon having supporting P/E ratios under 10, those competitors could draw more value investors.
TMUS PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
T-Mobile's past gains and future potential
Without question, T-Mobile has produced massive gains for its investors. The over ninefold gain in T-Mobile stock bests its peers by a wide margin, and that outperformance will likely continue.
At first glance, paying a dividend could make investors think it will face declines similar to AT&T and Verizon. Nonetheless, at a 1.75% dividend return, T-Mobile should have payout costs that are a fraction of its peers.
Additionally, as a newer company, it does not face legacy costs concerning pensions, lead-clad cables, and other past business decisions that have proven costly. Such conditions probably leave T-Mobile best able to compete and try new approaches in the wireless business.
