T-Mobile Stock Poised to Outperform Peers with Stellar Quarter

Key Points

• When disappointing PMI data sends the market lower, T-Mobile stock stays positive during the day.
• The optimism came from the company reporting its latest quarterly earnings results, showing industry-leading growth. 
• Wall Street analysts agree that the stock has an additional double-digit upside ahead. 

Certain stocks and sectors are fundamentally built to outperform most—if not all—other stock market peers despite the economy's challenges. As consumers are concerned by inflation pressures and rising unemployment rates, some stocks in the cyclical consumer discretionary sector may fall out of favor in the coming quarters. Leaving that gap behind will also create a space to be filled by other business models with a less cyclical nature.

Some may describe these models as predictable and stable cash-flowing businesses, such as those that rely on subscription-based revenues. After shares of Spotify Technologies NYSE: SPOT rallied by over 25.8% after reporting a spectacular quarter, investors can start to appreciate the preference markets that have developed for these subscription businesses.

Today, the shares of T-Mobile US Inc. NASDAQ: TMUS are on the rise after the company announced its quarterly earnings. The positive market reaction is amplified further as the stock market is selling off after disappointing economic data found in the ISM Manufacturing PMI index, which is now in a 21-month contraction, sending the S&P 500 lower by over 1%. The reason markets reward T-Mobile sock despite a market-wide selloff may be found in the financials.

A Stellar Quarter Propels T-Mobile Stock with Superior Financials

A 3% revenue growth showcased in T-Mobile's quarterly earnings press release is insufficient to send the stock into positive territory in the middle of a broader market selloff, so investors need to look past that number and find the real cause for optimism.

The revenue increase was mainly driven by 301 thousand postpaid account additions, making T-Mobile's growth the best in the industry, as quoted by management inside the release. But that isn't the only metric management quoted as the best in the industry.

High-speed internet users grew by 406,000 in the quarter, showing the industry's highest rate of additions. This could also explain why shares of AT&T Inc. NYSE: T and Verizon Communications Inc. NYSE: VZ have yet to reach the market capitalization that T-Mobile has.

As a proxy for market preference and confidence, T-Mobile's market capitalization of $206.5 billion today stands above AT&T's $137 billion and Verizon's $173.6 billion. Markets – and investors – should look past the account additions and revenue to justify today's valuations.

A justification can be found in the massive free cash flow (operating cash flow minus capital expenditures) growth over the past 12 months. Reaching $4.4 billion in free cash flow represents an annual jump of over 54%, giving T-Mobile management access to more capital subject to reinvestment or distribution to investors.

That is another bullish point for investors to consider. T-Mobile management returned up to $3 billion to stockholders through a share buyback allocation of $2.3 billion and an additional $759 million in dividends.

Buying back stock when prices are nearing a new all-time high sends an essential message to the market. The message is that, despite bullish momentum, insiders believe the stock may have additional room to run higher.

Wall Street Sees More Upside for T-Mobile Stock

T-Mobile's earnings per share (EPS) have grown 34% over the past 12 months, so analysts on Wall Street have decided to forecast an additional 21.7% EPS growth for the next 12 months. These projections are above AT&T's forecast of 5.4% and Verizon's 2% forecast.

With growth forecasted to be above peers and having the best in the industry growth in accounts, analysts at Citigroup saw it fit to boost their price targets on T-Mobile stock to $210 a share from their previous $184 a share target. To prove the new valuations right, T-Mobile needs to rally by an additional 14.2% from where it trades today.

Additionally, these price targets would mean that T-Mobile stock should reach a new all-time high. Investors need to understand that these projections are realistic, based on the fact that, no matter whether the economy is booming or busting, consumers will always find a way to keep up with their phone and data bills.

The predictability and stability of these cash flows enable Wall Street to confidently project the company's financials and valuations. This is why management also boosted their 2024 free cash flow guidance to $5.7 million, up from a previous guidance of $5.2 million. This, of course, means more potential buybacks and dividend boosts for investors.