T-Mobile Shares Gain Over 6% After Earnings Beat; Buy with Target Price $138

T-Mobile US Inc, the third-largest US wireless carrier by subscribers, reported better-than-expected profit and revenue in the third quarter and said it added more phone subscribers as demand bounced amid COVID-19 pandemic, sending its shares up over 6% during after-market hours trading on Thursday.

The U.S. wireless carrier said its total service revenues increased year-over-year to $14.1 billion in Q3 2020 and total revenues increased year-over-year to $19.3 billion in Q3 2020, driven by the Sprint merger and continued customer growth. That was higher than the market expectations of $18.34 billion.

T-Mobile’s EPS was relatively flat year-over-year at $1.00 in Q3 2020, beating Wall Street estimates of $0.45 per share, as growth in net income was offset by a higher number of outstanding shares as a result of the Sprint merger. Net income increased year-over-year to $1.3 billion in Q3 2020, as revenue growth outpaced expense increases. Merger-related costs were $288 million pre-tax and $208 million, net of tax, in Q3 2020.

The wireless carrier said its postpaid phone net customer additions were 689,000 in Q3 2020, leading the industry and marking the 27th consecutive quarter of leading the national carriers. That was higher than analysts’ estimates of 422,000. Postpaid phone churn was 0.90%.

“T-Mobile US reported blowout 3Q20 results as the business has not missed a beat amidst the S merger integration. We view the 1Q21 Analyst Day and updates to merger synergy/LT financial targets as a meaningful NT catalyst. We meaningfully raised our estimates and our price target to $159,” said Colby Synesael, equity analyst at Cowen and Company.

T-Mobile US shares climbed 6.39% to $124.75 during after-market hours trading on Thursday; the stock is up about 50% so far this year.

Executive Comments

“Last quarter T-Mobile overtook AT&T to become #2 in U.S. wireless and today we announced our highest ever postpaid net adds. Now, with over 100 million wireless customers and America’s largest 5G network, there is no doubt that we’re the growth leader in wireless,” said Mike Sievert, T-Mobile CEO.

“Customers are choosing T-Mobile in record numbers because we are the only ones that can deliver this combination of value and experience with a true 5G network that is available to customers in every single state! We’re consistently and profitably outpacing the competition – and we’re just getting started!”

T-Mobile US Stock Price Forecast

Twelve equity analysts forecast the average price in 12 months at $138.50 with a high forecast of $150.00 and a low forecast of $121.00. The average price target represents an 18.11% increase from the last price of $117.26. From those 12 analysts, 11 rated “Buy”, one rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $124 with a high of $154 under a bull-case scenario and $73 under the worst-case scenario. The firm currently has an “Overweight” rating on the wireless network operator’s stock.

“Our price target assumes an 8.5x multiple on 2024e cash EBITDA discounted back at 9%. This multiple is a premium to AT&T and Verizon at 7x given higher exposure to wireless and a superior growth trajectory,” said Simon Flannery, equity analyst at Morgan Stanley.

Several other analysts have also recently commented on the stock. Credit Suisse raised the target price to $146 from $140; JP Morgan upped their stock price forecast to $150 from $140; UBS increased the price target to $140 from $120; Evercore ISI resumed coverage with outperform rating and $150 price target. T-Mobile US had its price target hoisted by equities researchers at Citigroup to $142 from $130. Barclays reissued a “buy” rating and issued a $135.00 target price on shares of T-Mobile US in August.

We think it is good to buy at the current level with a target of $138 as 100-day Moving Average and 100-200-day MACD Oscillator signal a buying opportunity.

Analyst Comments

“With the closing of the Sprint merger on April 1, T-Mobile has established itself on relatively equal footing with AT&T and Verizon. Postpaid market share now stands at nearly 30% with the company targeting 2-4% service revenue growth,” Morgan Stanley’s Flannery added.

“The company will be focused on the large integration ahead as it targets $6bn+ in run-rate synergies with the majority coming from decommissioning the legacy Sprint network and moving those subscribers over to a new 5G network. Fixed wireless broadband-enabled by the company’s enhanced mid-band spectrum portfolio could open up an $80bn+ adjacent TAM.”

Upside and Downside Risks

Upside: 1) Better net adds and ARPU growth driven by new 5G network. 2) Quicker synergy realization. 3) Significant growth in fixed wireless broadband – highlighted Morgan Stanley.

Downside: 1) High churn of Sprint subscriber base. 2) Difficulty in achieving synergy targets and integrating Sprint subscribers. 3) Wireless competition intensifies pressuring ARPUs.

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