5G And T-Fiber Expansion Will Unlock New Opportunities

Key Takeaways

• T-Mobile's growth in postpaid and broadband, driven by 5G leadership and strategic expansion, suggests potential for revenue and profitability increases.
  
• Strategic fiber expansions and innovations in 5G and digital platforms could enhance margins and drive future earnings growth.
  
• Potential tariffs and competitor promotions could pressure T-Mobile's margins and earnings, while fiber expansion may initially strain short-term profits and service revenue growth.

Catalysts

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

• T-Mobile's capability to continue growing its customer base in both postpaid and broadband segments, particularly through new record postpaid net additions and leadership in 5G broadband adds, indicates potential for revenue growth.
  
• The launch and expansion of T-Fiber following the acquisition of Lumos, along with further expansion plans via Metronet, could lead to incremental service revenue growth and enhance long-term profitability.
  
• Innovations such as the rollout of 5G Advanced and T-Satellite, alongside enhancements in digital platforms like T-Life, signal operational improvements that could drive margin expansion and future earnings growth.
  
• Escalating postpaid ARPA expectations and targeted price optimizations could lead to a rise in average revenue per user, enhancing revenue and gross margins.
  
• The company's strategic investments and partnerships in fiber markets, designed to leverage T-Mobile's customer base and network capabilities, are likely to provide improved EBITDA growth and value-accretive returns from increased broadband penetration.

T-Mobile US Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T-Mobile US's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $16.0 billion (and earnings per share of $15.39) by about April 2028, up from $11.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $13.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 23.0x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 14.8x.
• Analysts expect the number of shares outstanding to decline by 3.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

T-Mobile US Future Earnings Per Share Growth

Risks

• The potential imposition of tariffs on handsets may result in higher handset prices, potentially dampening upgrade rates and affecting T-Mobile's customer acquisition and retention, which could impact future revenues and earnings.
  
• Elevated churn rates across the industry, possibly due to reactions to pricing strategies, could pose a risk to T-Mobile's customer growth and service revenue targets.
  
• Increased promotional activity by competitors, particularly focused on device promotions, may require T-Mobile to increase its own promotional spending, which could affect net margins and earnings.
  
• The focus on expanding fiber offerings, while aimed at providing growth opportunities, may initially act as a drag due to investment requirements before becoming accretive, potentially impacting short-term earnings.
  
• The company's decision to largely pursue opportunities where it can be first to fiber may limit its immediate addressable market, potentially constraining growth in service revenues and cash flows if these areas do not offer sufficient customer density or demand.

Valuation

• The analysts have a consensus price target of $266.224 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 $305.0, 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 $96.2 billion, earnings will come to $16.0 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $241.59, the analyst price target of $266.22 is 9.3% 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.