When John Legere came on board as CEO of T-Mobile US Inc (NASDAQ:TMUS) back in September 2012, there was little fanfare. The fact was that the company was a marginal operator in the telecom industry. It also did not help that TMUS’s corporate parent, Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY), tried to unload the firm to AT&T Inc. (NYSE:T), but the Justice Department blocked the deal.
Yet Legere believed there was tremendous potential with T-Mobile. In fact, in the press release for his appointment as CEO, he boasted that the company would become a “force in our industry.”
Well, he certainly made this a reality — and fast. Since coming public through a complicated reverse merger structure in May 2013, TMUS stock has gained a sizzling 250%. Although, along the way, there was quite a bit of doubt and skepticism about the company’s prospects.
But going forward from here, what can investors expect? Are there still nice opportunities for growth?
To see, let’s consider three pros and cons on TMUS stock:
3 Pros on TMUS Stock
Branding Prowess: Given that the U.S. mobile market is fairly saturated, growth is really about taking marketshare away from tough rivals like AT&T and Verizon Communications Inc. (NYSE:VZ). But this is incredibly tough for a company like TMUS, which has limited resources for marketing.
As a result, Legere has taken a very unconventional approach. Of course, a big part of this has been leveraging social media platforms — especially his own! Keep in mind that he has more than 3.7 million followers on Twitter Inc (NYSE:TWTR). And with it, he often trash talks his competitors (such as with using “F bomb” and referring to AT&T and Verizon as “Dumb and Dumber”), highlighting products and even chatting about his non-business activities, like his cooking.
For the most part, Legere has effectively created a unique brand that is brash and gets above the noise. It has also resonated with customers that are tough to attract, such as Millennials.
Un-Carrier Strategy: Branding means little if there is nothing to back it up. So early on, Legere looked at ways to disrupt the norms of the industry, such as hefty fees, onerous contracts and expensive upgrades. Going against all this, Legere launched programs like no-contract subscriptions, transparent pricing, low-cost global roaming fees, free Wi-Fi calling and music streaming that does not count against the cap.
But he also made aggressive efforts to improve the infrastructure, such as with the purchase of spectrum. Oh, and then there was the acquisition of MetroPCS, which provided a nice footprint in the prepaid category.
Growth: It has certainly been robust for TMUS. In the latest quarter, revenues jumped by 23% to $10.18 billion and earnings came to $390 million, or 45 cents a share, which was up from $297 million or 34 cents a share in the same period a year ago.
The key has been the traction with user acquisition. For example, in Q4 the net adds were 2.1 million. Consider that there has been 15 consecutive quarters of increases of over 1 million. In all, there are 71.5 million total customers.
The churn rate is also trending nicely. Currently it is at 1.28%, which is the best in TMUS’s history.
3 Cons on TMUS Stock
Competition: It could get tougher, especially as T-Mobile continues to make inroads against its rivals. Keep in mind that Verizon has recently announced an unlimited usage plan. This is even though the company had previously been adamant that it would not! In other words, there may be more aggressive pricing and promotions — and soon.
VZ and AT&T also have some other key advantages that could blunt the momentum of TMUS. After all, they have other services like cable, cloud computing and business plans that can be bundled into attractive offerings.
Interestingly enough, even Sprint Corp (NYSE:S) is becoming a factor, as seen with encouraging subscriber gains. Then again, the company has been getting much more aggressive on pricing.
Valuation: TMUS stock is far from cheap, with the price-to-earnings ratio at a hefty 36X.
Now part of this is due to the strong growth path. But it also appears that there has been a boost from the prospects of a merger — say with Sprint.
Yet it is important to note that dealmaking in the telecom space has seen several blocked transactions. Given that the industry only has a handful of players left, it could be tough to get approval from regulators.
Capital Costs: They are enormous. What’s more, a smaller company like TMUS is at a disadvantage compared to Verizon and AT&T when it comes to bidding.
In fact, if the company gets outbid, the growth rate could be stunted. According to the 10-K of TMUS: “We will be at a competitive disadvantage and possibly experience erosion in the quality of service in certain markets if we fail to gain access to necessary spectrum before reaching capacity. As a result, we are actively seeking to make additional investment in spectrum, which could be significant.”
Bottom Line on TMUS Stock
Legere has certainly pulled off an amazing turnaround. And yes, a key has been on an obsessive focus on the customer. For example, at his desk he has access to incoming customer calls. He also takes frequent trips to customer call centers.
Furthermore, Legere has a knack for branding, which is in tune with modern digital platforms.
However, it’s probably going to get tougher to churn out the growth as AT&T, Verizon and Sprint get more competitive. Besides, the valuation of TMUS stock already accounts for much of the good news, including the speculation of an acquisition.
So in light of all this, it is probably a good idea to wait until the shares get to a cheaper valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
