T-Mobile Stock's Decline: Does Value Potential Exist?

Key Points

• The T-Mobile stock has experienced an unusual decline in its price as a function of industry-wide action. However, the fundamentals of the business point to these declines being as unjustifiable as they come.
• During a recent interview, the CEO reiterated the company's relative position in the industry, highlighting the quality of its value proposition driving consumer payment quality and others.
• Aggressive growth across financials and an introductory user growth rate beating estimates for the second quarter may be enough to fulfill the market's perception of the stock as these valuation multiples vote for a rally ahead.

Investors rarely get to consider a blue-chip company like T-Mobile US NASDAQ: TMUS amid a decline of more than 17% during the past two months. As the underlying stock carries a beta of only 0.56, a significant move like the one seen in previous months is out of the usual. Beta represents a proxy for volatility, where any reading above 1.00 implies the stock in question is more volatile than the S&P 500 benchmark.

Conversely, a reading below 1.00 would mean the stock is less volatile than the benchmark. Considering that the S&P 500 has risen during T-Mobile's decline, the foundation is laid for the possibility of an upcoming 'catch up' rally.

Despite most positive words by the CEO during an interview with CNBC nearly three weeks ago, the stock has not done much. What is undeniable, however, is the fact that T-Mobile has outperformed other closely followed names in the sector.

During the past twelve months, even after the unusual decline in the stock price, T-Mobile outperformed names like AT&T NYSE: T and Warren Buffett's Verizon Communications NYSE: VZ by 27.3% and 32.5%, respectively. Additionally, the broader markets have voted on which stock is the favorite in this tight group. This is a significant indicator for investors to know which 'horse' to bet after the sell-off.

Fundamentals say Otherwise

Mike Sievert, T-Mobile's CEO, reiterated the company's positioning during a CNBC interview. These words come after the company released first quarter 2023 earnings results, where executives raised their guidance for the full-year 2023.

During times of a questionable economy, full of recessionary and inflationary fears affecting the spending choices of virtually all American consumers, T-Mobile users outperformed those in AT&T and Verizon by "Paying their bills more reliably..." which goes to show that the company is succeeding at delivering on their value proposition. 

The optimism comes after the company reported industry-leading postpaid and broadband customer growth. Within the quarterly earning release, statistics point to an increase of 287 thousand account additions to postpaid segments, followed by an even more impressive 1.3 million net customer addition to the same segment.

High-speed internet segments posted a net customer addition of 523 thousand, again placing the company ahead of competitors for the period and reinstating its value proposition as a preference over the competitor. All of these key drivers in the business attributed to similarly impressive financial results. 

Net income grew to $1.9 billion for the quarter, posting a formidable 172% growth rate compared to net income from the prior year. Adjusted free cash flow was reported to be $2.4 billion in the quarter, representing an annual advance of 46%, a level which allowed for management discretion in choosing to return some of these funds to shareholders. Management deployed $4.8 billion into share repurchases during the quarter; considering that these buybacks were implemented at prices above the recent sell-off, investors can acquire the stock cheaper than insiders did.

Extra Momentum

Broader markets have voted on the direction of the stock relative to competitors in the space. As T-Mobile blew past expectations during the first quarter, simultaneously raising 2023 guidance to reflect more users and more free cash flow gains, CFO Peter Osvaldik has laid out yet another critical driver update ahead of the closing of the second quarter results. The CFO announced to investors that phone subscriber gains, as far as the second quarter is concerned, has already reached approximately 700 thousand compared to the latest estimate, which pointed to 664 thousand.

Considering that T-Mobile stock trades today for a 39.3x price-to-earnings ratio, comparing the market perception reflected in competitors' valuation multiples may provide another hint for investors considering a purchase. AT&T has no earnings to show for the trailing twelve-month measure. Thus, no proper P/E can be assigned. However, based on analyst earnings estimates, AT&T is priced at a 6.2x multiple to the next twelve month's earnings. Verizon's P/E stands at a mere 7.0x today, placing both well below T-Mobile's richer valuation.

Some may argue that this only makes T-Mobile the more 'expensive' choice in the sector; however, considering the fundamental momentum seen within the company, these valuations can be taken as investor willingness to overpay for the company's current - and future - underlying earnings. This higher perceived quality, as agreed upon by the broad market, should be enough to justify all the positives the company offers today.