T-Mobile Had A Solid 2022. What Does 2023 Hold?

T-Mobile stock (NASDAQ:TMUS) was a star performer through 2022, rising by about 22% over the year, outperforming its peers in the wireless sector, and the broader S&P 500 index, which was down almost 20% over the same period. There have been a lot of positive developments for the stock. While T-Mobile was viewed as a value-focused carrier through the 3G and 4G eras, the company is emerging as a network leader of sorts in the 5G era, thanks in part to the rich spectrum haul from the Sprint merger. The strong network is helping the company win over more customers, raise prices, and improve customer loyalty. For perspective, over Q3 2022, the company added 854,000 postpaid phone subscribers, compared to AT&T which added 708,000 postpaid phone subscribers driven by device promotions, and Verizon which added a mere 8,000 subscribers. Customer churn has also trended lower matching Verizon.  T-Mobile is also expanding beyond the phone market into the broadband space, with its fixed wireless broadband offering adding an industry-leading 578,000 new broadband subscribers over the last quarter.

Now that the stock has outperformed considerably, is it still good value going into the new year?  T-Mobile trades at about 22x consensus 2023 earnings, a meaningful premium versus its peers such as Verizon and AT&T who trade at 8x and 7x forward earnings, respectively. However, we think the premium is justified given T-Mobile’s superior earnings growth prospects. While T-Mobile’s bottom line in recent quarters has been impacted by a costly integration of Sprint’s wireless network with T-Mobile’s following their 2020 merger, the decommissioning of Sprint’s legacy network is now complete and we are likely to see considerable merger synergies (recently revised upward to $5.7 billion to $5.8 billion for 2022). This should also help profits and cash flows pick up meaningfully. T-Mobile previously guided for a free cash flow of between $13 billion to $14 billion in 2023, up from levels of about $6 billion in 2021, while noting that the number could touch $18 billion in 2026. The rising cash flows are expected to help fund significant share buybacks, which, in turn, could further bolster company’s earnings per share and stock price. We value T-Mobile at about $168 per share, which is about 20% ahead of the current market price. See our analysis on T-Mobile valuation: Expensive or Cheap for more details on what’s driving our price estimate for the company. Also, check out our analysis of T-Mobile revenue for more details on the company’s key business segments and how revenues are likely to trend.

[1] Month-to-date and year-to-date as of 1/4/2023
[2] Cumulative total returns since the end of 2016