Motley Fool Analyst Nathan Hamilton is a T-Mobile (NASDAQ:TMUS) shareholder. He's down 20% since he bought the stock earlier in 2014, but explains to Sean O'Reilly why he doesn't regret the purchase.
This tech edition of Industry Focus takes a closer look at T-Mobile's market position, CEO John Legere's approach to the industry, the company's Uncarrier initiative to lure customers away from mobile giants Verizon and AT&T, and what to watch before selling the stock in 2015.
A full transcript follows the video.
Sean O'Reilly: Nathan Hamilton is down 20% of stock, but refuses to sell! We'll find out why he's a masochist on this tech edition of Industry Focus.
Howdy everybody, thanks for listening. This is the tech edition of Industry Focus. I'm Sean O'Reilly with the one and only Nathan Hamilton, and today we'll be grilling him on why he refuses to sell T-Mobile.
Nathan Hamilton: I am a masochist, I guess.
O'Reilly: Why do you like the pain? What's going on here? Just buy Verizon (NYSE:VZ). Just buy Verizon, that's a winner!
Hamilton: I don't know if I like the pain, but definitely we'll get into some thoughts on concerns for the future for T-Mobile, why I'm down, why I'm losing money -- poor me! -- and some of the positives for the company.
O'Reilly: Awesome. Okay, so you're going to try to save yourself here and convince us all why you have been right while Wall Street says you're wrong.
O'Reilly: First and foremost, give us a little bit of background. When did you buy? Why did you buy? Do you regret it?
Hamilton: I bought in mid-2014. No, no, certainly don't regret it. I'm down about 20% since that timeframe.
I think one thing that's important to look at is, Foolish investing and so forth, we don't look at it as, "Hey, there's a buyout rumor, I'm going to buy. Hopefully I go from the $30 to $40, which was one of the offering prices."
O'Reilly: Make some quick money, go shopping with the wife ...
Hamilton: Yes. It wasn't actually any of that rationale, initially investing in it. You just have to look at what's happening with the company as a whole. What are they doing? How are they changing the industry, and so forth?
When you look at it, the management team, John Legere; many people follow him, they see what's happening with the company. He's pretty much taken an industry which most people hate -- kind of like cable ...
O'Reilly: Not as much as cable. Almost.
Hamilton: Yes, who knows? Yes, telecoms and cable.
O'Reilly: Wait a while!
Hamilton: Yes, people are passionate about it. But taking a model that most people dislike -- pricing, fees, overages, gouging, all this -- and T-Mobile in mid-2013 started to move and say, "We want to bring the most valuable telecom service to users and subscribers." You see that trajectory moving along.
As we've gone since 2013 and so forth, we've seen a consistent trend of adding subscriber growth which, beyond just adding subscribers, the company is improving their network, improving customer service. It's the value proposition as a whole.
O'Reilly: We've talked about this before.
Hamilton: We have.
O'Reilly: We've talked about the carrier, the spectrum, and all this stuff.
O'Reilly: Just a real quick overview; how have they been adding all these subscribers with their Uncarrier 8.0 plan?
Hamilton: Uncarrier 8.0 happened, I believe it was Wednesday or Thursday of last week. What they announced specifically for Uncarrier 8.0 is what they call Data Stash. It's really just overages for your data. Any unused data will roll over to the next month.
O'Reilly: "That's my data. I want to keep it."
Hamilton: Exactly. Companies have done that before with the minutes -- rollover minutes, AT&T (NYSE:T) does that -- but nobody does it with data. If you look at how we're using our mobile devices, it's really moving more toward data than it is actual voice usage.
Hamilton: As T-Mobile would say, this is a pain point with users, and that's what the Uncarrier initiative is all about.
O'Reilly: Over the last year, have they just been trying to attack the pain points? Because obviously they've done the Uncarrier, so they haven't been making you do contracts, they've competed on price. Are they just going after all these pain points, and that's how they've been snagging people so far?
Hamilton: Yes, it's the value proposition. The company may refer to it as "pain points." I'll call it value proposition.
Really, what it comes down to is the company got rid of two-year contracts, international roaming fees, free music streaming, Wi-Fi calling as well. There's an interesting juxtaposition because if you listen to John Legere he'll say, "Hey, it's not a price war. We're not moving on price." But if you actually look at it, it kind of is.
O'Reilly: I've looked. They kind of are.
Hamilton: Yes, if you look at it, they are certainly moving on price. But say offering data rollover or free Wi-Fi calling or international roaming; these are all charges of some sort. Backing those out, in a roundabout way you are moving on price a little bit.
If you look at the value proposition, customers look for pricing, customer service, and network quality, so it definitely is part of what T-Mobile is doing.
O'Reilly: That's been the big question on my mind as we've talked about these carriers. In your mind -- not just as a shareholder but as a consumer -- is T-Mobile's network as good as the Verizons and the AT&Ts? Because they could have a cheap price all they want, but if I'm going to lose signal in a major metro area, that's not going to fly in 2014 America.
Hamilton: T-Mobile's strategy is essentially ...
O'Reilly: 2015 America, pretty soon!
Hamilton: ... is to look where they can move the needle the quickest. T-Mobile's network before 2014, to be honest, was crap. The ratings spoke for it; dropped calls, everything, slow data speeds.
You have to look at it; how can T-Mobile move in a very short period of time? They've got to go to urban cities where the population is. They have vastly improved their network.
O'Reilly: They've rocketed up in the consumer reviews. That's proof in the pudding.
Hamilton: But if you look on the fringes, where T-Mobile gets some knocks is the rural areas or outside of major metropolitan areas. The network quality isn't on par. If you look at it nationwide, Verizon's the top network, AT&T is just behind. T-Mobile just jumped ahead of Sprint (NYSE:S) this year, so definitely making moves, but it's definitely not the top network.
O'Reilly: Just on a scale of 0-100 -- let's pretend Verizon's 100 on the network quality scale. Where is AT&T, where's T-Mobile, where's Sprint?
Hamilton: I don't know the exact numbers, but Root Metrics puts out a survey biannually and they rate it based upon data usage, speed, reliability. That's what I mentioned with the top four ratings. You've got Verizon, AT&T ... Verizon has a pretty clear lead when you look at all the factors for network quality.
O'Reilly: But is it a vast difference? Is Verizon 100, AT&T's 95 and T-Mobile's a 90, which actually wouldn't affect most people's lives at all, between the three of them?
Hamilton: It's a good question. I know T-Mobile wants to get there eventually. But I don't know the specifics of where they sit, giving it a rating.
O'Reilly: How many people have they been convincing? What have the subscriber numbers been?
Hamilton: Pretty good. Very good, I guess I should say. If you look at post-paid versus prepaid subscribers, post-paids are going to be like you or I. I'm sure you have a two-year contract, you're locked into it.
Hamilton: Prepaid subscribers are just the monthly ... you buy minutes. The most desirable ones are going to be your postpaids because they pay higher prices, they don't churn at a very high rate -- meaning they stay with the company for a long time.
Some have argued T-Mobile maybe, with removing their two-year contracts, is grabbing some of the prepaids and turning them into post-paids, potentially. Now, that definitely is a concern to look at. It's definitely a concern to look at.
O'Reilly: They've been snagging the prepaid people that have been going to Wal-Mart (NYSE:WMT) to get their cell phones? Make it real for us.
Hamilton: Yes. They've been grabbing valuable subscribers, no doubt about it. Some post-paids from ... when you move on price, when you move on the value proposition, you're going to gain some subscribers from Verizon and AT&T.
And, Verizon and AT&T have actually come out recently and said, "Okay, we're seeing competitive pressures," so T-Mobile is grabbing some of those valuable subscribers. But they're also grabbing some of the lower-end subscribers as well.
You look at, how does that affect the company and the financials? Potentially a higher churn rate because the customers may switch. They're not paying as much, per user. Obviously that's going to affect your cash flow.
O'Reilly: Right. As a shareholder, you're down 20% but you refuse to sell. You're clutching to these shares! What are some legitimate concerns that you might have, as a potential shareholder -- say, I don't know, me. I want to go buy some shares because you've convinced me they're competing effectively and they're going to start grabbing more and more subscribers.
Hamilton: You've got to separate how the business is doing, versus how the stock is doing. The stock is fairly highly valued. There are some expectations built into the share price.
But as you look over the next year or so, I think there are concerns and maybe the share price doesn't do a whole lot, but I'm looking at a longer term than 2015 for my investment.
O'Reilly: As you should, as a Foolish investor.
Hamilton: Exactly, we want long term. Here's how we have to look at it. Sprint recently took on their CEO, Marcelo Claure. He came in, moved aggressively on price very quickly.
O'Reilly: Very aggressively.
Hamilton: This was only partway through the most recent quarter, so we don't have a full indication of how Sprint subscriber numbers are going to trend in coming quarters or in 2015. That is a key point that I think is important to watch.
If you look at it, ultimately I don't think it's going to be a huge dent in T-Mobile's business, but when you move on price you're going to attract some subscribers. You can't ignore that, so it definitely is something to watch.
O'Reilly: Sorry to interrupt. Is it possible that the consumers that aren't obsessed with network quality -- because arguably those people would be on Verizon and AT&T -- is it possible that Sprint in its price war is going to hurt T-Mobile more than they will Verizon?
Hamilton: That could be the case, because you look at it as ...
O'Reilly: Because if you're not super concerned about network quality, you'll probably be on a cheaper price point or something.
Hamilton: I think, when you look holistically at a user or a consumer when they pick a company, part of why they stay is they're locked into a contract. That's changing a little bit with the industry.
Another part of it is you have to take into account what are the perceptions of network quality and customer service? That really is the driving factor. Sprint isn't trending too well right now in those areas. They have the backing of SoftBank and a lot of capital to go after it.
O'Reilly: Tens of billions of dollars.
Hamilton: Exactly, which is a very legitimate concern for T-Mobile, and I imagine if you see Sprint starting to pick up subscribers and network quality, and customer service starts to improve, T-Mobile stock would take a dent. It would be hit.
O'Reilly: Got it. Okay, very good. Any other major concerns?
Hamilton: I think those are the main things. What to watch for; subscriber growth, network quality, all of those ratings.
I think one thing also that's important, I touched upon Verizon and AT&T mentioned competitive pressures. Verizon has been adamant, saying, "We are never going to move on price."
O'Reilly: "We're going for quality."
Hamilton: Exactly. "We want the premium guys. We want those subscribers paying for our network, paying for our service, all of this."
O'Reilly: How many are there of those people out there, though?
Hamilton: There's a lot. That's the reason why Verizon and AT&T have hundreds of millions-plus subscribers, whereas T-Mobile has in the mid-50s, Sprint is the same.
O'Reilly: Got it.
Hamilton: Looking at it, Verizon says they're not going to move on price, but recently commented that they're seeing pressure from ...
O'Reilly: They might have to eat their own words.
Hamilton: Yes. That really could be a pretty significant threat to T-Mobile in the future, because if you've got the most premium, most valuable provider out there -- which many perceive is Verizon -- and they start to come down in price? It could affect T-Mobile.
O'Reilly: Makes sense. Very good.
Hamilton: But I'm not selling! Not right now.
O'Reilly: He's got a stock and he's sticking with it.
Hamilton: I am. I am.
O'Reilly: Very good.
Hamilton: You look at the long-term prospects, and with Legere at the helm I'm pretty confident in the turnaround that they're executing. I don't know if I've said it on our show before, but I look at it this way. There's either going to be a Harvard Business case written about this amazing turnaround, or it's going to be a business case in failed strategy.
Hamilton: My bet is on the turnaround -- marketing turnaround and corporate strategy. I think they're trending positively.
O'Reilly: Very nice, cool. Thanks for your thoughts. That is it for us, Fools. Thanks for listening, and Fool on!
Nathan Hamilton owns shares of T-Mobile US. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.