5G Expansion And SpaceX Partnerships Will Strengthen Market Position

Key Takeaways

• Strategic partnerships and digital transformation initiatives enhance customer engagement, revenue growth, and offer potential for market expansion and revenue diversification.
  
• Industry-leading 5G network expansion and share buyback programs strengthen competitive positioning, support revenue growth, and enhance shareholder value.
  
• Heavy reliance on postpaid growth and strategic investments in technologies like AI and 5G face execution risks that might pressure earnings and net margins.

Catalysts

Provides mobile communications services in the United States, Puerto Rico, and the United States Virgin Islands.

• T-Mobile's focus on digital transformation through platforms like T Life is enhancing customer experience and increasing engagement, potentially leading to sustained revenue growth as they deepen relationships and boost ARPA.
  
• The company is leveraging industry-leading network advancements, including the expansion of their 5G network and T-Priority services, which could enhance competitive positioning, drive new customer acquisitions, and improve net margins.
  
• T-Mobile's strategic partnerships, such as with Vistar for digital advertising, offer new revenue streams and further expansion opportunities beyond core wireless services. This could positively impact revenue diversification and contribute to sustained earnings growth.
  
• The leadership in fixed wireless access, including the successful rollout of affordable broadband options, positions T-Mobile for ongoing market share gains, which can drive service revenue and support a strong EBITDA profile.
  
• T-Mobile's robust share buyback program, supported by substantial free cash flow generation, is anticipated to drive significant earnings per share growth and deliver shareholder value.

T-Mobile US Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T-Mobile US's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 16.1% in 3 years time.
• Analysts expect earnings to reach $14.8 billion (and earnings per share of $14.44) by about January 2028, up from $10.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $12.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, down from 24.7x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 4.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

T-Mobile US Future Earnings Per Share Growth

Risks

• There is mention of the tapering of wholesale revenue from partners like TracFone and DISH, with 2025 expected to be the low point before growing again, indicating potential risks to revenue in the near term due to decreased contribution from these sources.
  
• The company is relying heavily on expected postpaid ARPA and service revenue growth while maintaining a competitive pricing strategy, which may present a risk if customer preferences shift or competitive dynamics change, impacting net margins.
  
• Increased cash interest payments, estimated at $3.9 billion, along with the anticipated cash income tax payments based on current policy, could put pressure on free cash flows and net earnings if revenues or operating performance fall short.
  
• The expectations set around the intensity and success of network and digital capability investments, particularly around AI, 5G advanced services, and the use of satellite connectivity through partnerships like SpaceX, could involve high execution risks that may impact earnings if not realized effectively.
  
• The ongoing integration of pending acquisitions and joint ventures, like those with USCellular and fiber providers, could pose integration and execution risks with additional financial burdens that might strain earnings and net margins if not strategically managed.

Valuation

• The analysts have a consensus price target of $244.76 for T-Mobile US based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $280.0, and the most bearish reporting a price target of just $184.95.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $92.2 billion, earnings will come to $14.8 billion, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $221.14, the analyst's price target of $244.76 is 9.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.