Expanding Horizons, How Tactical Moves And Innovative Offerings Propel Market Leadership And Revenue Growth

Key Takeaways

• T-Mobile US's strategy focuses on expanding into smaller markets and diversifying services, aiming to grow its customer base and increase revenues.
  
• Investments in high-speed internet infrastructure and acquisitions in the value segment highlight efforts to raise ARPU and enlarge market share.
  
• Regulatory changes, increased competition, and execution risks in strategic partnerships could significantly impact T-Mobile's revenue, market share, and profitability.

Catalysts

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

• T-Mobile US's emphasis on growth within smaller markets, rural areas, and the government and enterprise sectors points to an expansion of customer base and services offered, likely increasing revenue and service subscription rates.
  
• The introduction of innovative home broadband offerings, including plans for home mesh networks and on-the-go usage, signals an exploitation of the growing demand for high-speed internet services, potentially raising the average revenue per user (ARPU) and expanding the customer base.
  
• Strategic investments in fiber through partnerships like the one with EQT for acquiring and expanding Lumos, and the commitment to invest in expanding the fiber footprint to 3.5 million homes by 2028, could significantly enhance T-Mobile's broadband infrastructure, supporting revenue growth from high-speed internet services.
  
• The acquisition of Mint and Ultra Mobile and the focus on direct-to-consumer and value segments are likely to augment T-Mobile's market share in these areas, supporting higher revenue and customer base growth.
  
• T-Mobile's strategic shift towards offering value-added services, indicated by their new home broadband products and enterprise solutions partnerships, suggests a diversification of revenue streams and enhancement of customer lifetime value, positively impacting overall profit margins and revenue.

Assumptions

• Analysts are assuming T-Mobile US's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.0% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $14.4 billion (and earnings per share of $14.62) by about September 2027, up from $9.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $11.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2027 earnings, down from 23.8x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 15.1x.
• Analysts expect the number of shares outstanding to decline by 0.82% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The potential for regulatory changes or interventions in the broadband and mobile markets could impact T-Mobile's ability to expand and compete effectively, potentially affecting revenue and market share.
  
• Challenges in the rollout or adoption of new services such as the home broadband and away-from-home offerings might not meet growth expectations, impacting anticipated revenue streams.
  
• Increased competition in both the home broadband and mobile sectors could lead to pricing pressures, impacting margins and overall profitability.
  
• Execution risks related to strategic partnerships and joint ventures, such as the one with EQT for acquiring Lumos, might not yield expected returns, affecting investment efficiency and cash flow.
  
• The reliance on the success of rate plan optimizations and promotions to drive user growth and retention in a highly competitive market might impact customer loyalty and ARPA (Average Revenue Per Account), affecting long-term revenue growth and stability.

Valuation

• The analysts have a consensus price target of $205.36 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 $250.0, and the most bearish reporting a price target of just $143.48.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $90.2 billion, earnings will come to $14.4 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 5.8%.
• Given the current share price of $193.0, the analyst's price target of $205.36 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.