T-Mobile Stock: TMUS Is One Spectrum Auction from Being the Next Sprint

Advertisement

Let’s face it — T-Mobile’s (TMUS) ability to drive subscriber growth comes down to its willingness to undercut prices and publicly bash competitors.

T-Mobile Stock: TMUS Is One Spectrum Auction from Being the Next SprintThe result of this activity has been a higher T-Mobile stock price the last two years but also surging debt and crashing free cash flow.

That said, T-Mobile’s network needs some serious help after falling to a distant fourth in RootMetrics’s latest analysis of overall network performance. This rating — combined with T-Mobile stock’s fast customer growth and the natural increase in data consumption — suggests that TMUS will be quite busy at the FCC’s next auction, and that is bad news for T-Mobile stock investors.

T-Mobile Stock’s Debt to Skyrocket

With that said, below is a chart of low-band spectrum that TMUS owns relative to its competitors — T-Mobile CEO John Legere posted this chart to Twitter several months back.

TMUS_LowBand_spectrumFor those of you who don’t know, spectrum is what allows data to flow from one point to another, so having a lot of it is necessary in an environment where those networks are getting more crowded.

What makes this relevant is the FCC’s upcoming auction is for low-band spectrum, which is essential in allowing mobile networks to transfer data across long distances and through buildings with ease.

Clearly, TMUS is lagging in this area.

TMUS_spectrumNetwork
Click to Enlarge
Not to mention, there is this other chart produced by AllNet Insights & Analytics and Fierce Wireless that shows T-Mobile’s entire spectrum network. A strong spectrum network with dense coverage should be pink and purple all across the U.S., but clearly TMUS lacks depth in many areas throughout the country, where it is filled with yellow and peach colors.

One could make a strong case that T-Mobile needs a big win in this upcoming FCC auction. But, with winning bids of nearly $45 billion at last year’s auction, we have to assume that TMUS would have to pay big in order to gain the spectrum assets it needs for complete, dense coverage in the U.S.

That’s probably why T-Mobile CFO Braxton Carter recently disclosed that T-Mobile “could” spend $10 billion at the auction without harming its credit rating. Of course, he later went on to say that the company could “probably” and “should” get the assets it needs for $1 billion, maybe $1.5 billion.

Given the way that last year’s auction exceeded all expectations, I can’t imagine that TMUS could gain the coverage it needs while only spending $1 billion to $1.5 billion. Thus, if T-Mobile is going to make any difference at all, it needs to bid in the multibillions.

T-Mobile and Sprint Start to Look Alike

With that said, T-Mobile’s horrible operating performance has been overshadowed by its impressive subscriber and revenue growth. Before 2013, prior to all these wireless price wars, T-Mobile had positive free cash flow of $500 million annually. That has since sunk to a loss of $2.9 billion over the last four quarters.

Further, T-Mobile’s debt has surged from about $8.7 billion in 2013 to north of $24 billion today.

In comparison, Sprint (S) has a trailing-12-month free cash flow loss of more than $5 billion and total debt of $34 billion. Therefore, TMUS performs better than Sprint.

However, if it is forced to spend big on this upcoming spectrum auction while Sprint sits it out, T-Mobile stock’s balance sheet could start to look a lot like Sprint’s.

Given the fact that Sprint is now undercutting T-Mobile’s prices, it could produce growth that is just as — if not more — impressive than T-Mobile’s from this point forward.

Still, the problem remains that both companies are grabbing new customers at an operating loss. So with Sprint having great capacity in its spectrum network, and T-Mobile not, one could argue that Sprint is the better investment of the two stocks.

Sprint Stock: The Lesser of Two Evils

When you incorporate the likelihood of T-Mobile’s debt rising from spectrum auctions, capital expenditures and ongoing operating losses, it further adds to the notion that it and Sprint are in the same conversation. While Sprint isn’t necessarily a good investment due to its own debt and losses, it is the lesser of two evils, especially trading at under 0.5 times 12-month sales versus nearly 1 times sales ratio for TMUS.

So the bottom line is that TMUS has to participate in this spectrum auction, needs to spend significantly due to its lack of density, and if it does so, TMUS stock could look a lot like Sprint stock.

And given the disconnect in valuation multiples and stock performance between Sprint stock and TMUS stock, one must assume that TMUS stock could have a ways to fall.

Brian Nichols does not own shares of either T-Mobile or Sprint

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/10/t-mobile-stock-one-spectrum-auction-next-sprint-stock-tmus-s/.

©2024 InvestorPlace Media, LLC