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Why T-Mobile US Inc (TMUS) Stock Isn’t As Strong As It Looks

It has been an impressive run for T-Mobile US Inc (NASDAQ:TMUS). TMUS stock traded as low as $7 in 2012; it’s now above $60. Over the past year, T-Mobile has been on an almost uninterrupted bull run.

Why T-Mobile US Inc (TMUS) Stock Isn't As Strong As It Looks

And there’s good reason for TMUS stock’s outperformance. T-Mobile is winning on the subscriber front, taking shares from AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) and beating out Sprint Corp (NYSE:S) with its unlimited data plan, which has been successful enough that much-larger Verizon reversed field.

After dismissing unlimited data for years, VZ added it to its own plan this month. Tax-included plans, another TMUS innovation, may be next.

Meanwhile, a T-Mobile-Sprint merger seems highly likely. Softbank Corp. (Japan) (OTCMKTS:SFTBY), Sprint’s majority owner, supposedly is in talks with TMUS stock majority owner Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY) that could lead to a Sprint-T-Mobile tie-up. The combination of the No.3 and No.4 players could present a stronger competitor to Verizon and AT&T and a substantial opportunity for cost-cutting and margin improvement.

But there has to be some question as to whether TMUS stock is pricing all this in — and then some. While the turnaround continues, T-Mobile’s valuation continues to rise. And that valuation is getting a bit stretched, while the turnaround might be nearing an end.

TMUS Stock Takeout Isn’t Guaranteed

Again, a lot is going right for T-Mobile at the moment. But that doesn’t mean there aren’t risks. A merger, for instance, seems all but a done deal in investors’ minds. Whether Sprint or cable companies like Comcast Corporation (NASDAQ:CMCSA) or Charter Communications, Inc. (NASDAQ:CHTR), few seem to think TMUS stock will last through the next few years.

After all, the new Republican administration should be more friendly to consolidation. A Sprint-T-Mobile tie-up would leave the industry still with three players — generally considered enough by GOP standards. And Comcast and/or Charter could look to T-Mobile to compete with the offering from AT&T/Dish.

But it’s far from 100% certain that a T-Mobile acquisition — by anyone — could get through regulatory review. Trump has also opposed the merger of AT&T and Time Warner Inc (NYSE:TWX), a deal that looks more benign from a competitive standpoint. Comcast or Charter could go after Sprint instead, leaving T-Mobile again disadvantaged.

Overall, it still seems likely that the company will merge with someone over the next few years. But it’s not guaranteed — and a tie-up isn’t guaranteed to drive TMUS stock higher, if at all. The announcement of a Sprint-T-Mobile tie-up, in particular, sounds like a classic “buy the rumor, sell the news” situation. And the market has been buying that rumor for several years now.

There Are Risks With TMUS Stock

Meanwhile, on its own, T-Mobile does have some challenges in front of it. While the market liked the company’s fourth-quarter earnings report this month, 2017 guidance didn’t seem particularly aggressive. Adjusted EBITDA was guided to $10.4 to $10.8 billion — up just ~3% at the midpoint. TMUS stock investors appear to have chalked that up to the company being “conservative,” but that may not be the case.

The concern from that guidance is whether T-Mobile’s aggressive strategies are affecting its margins. Indeed, there’s a fear that its pricing, in particular, is pressuring margins across the space. All four U.S. wireless stocks fell when Verizon announced its unlimited data plan. There’s a clear fear of a ‘race to the bottom’ as networks improve.

If companies can’t compete on service, which becomes the case when data speeds and reliability are “good enough” across the board, they then compete on price. And that could become an issue for the industry as a whole.

T-Mobile’s Valuation Matters

T-Mobile deserves a lot of credit for its operational improvements, to be sure. But valuation matters, too. Investors clearly are concerned about the wireless space as a whole. AT&T stock trades for just 14x earnings-per-share. VZ stock is at its cheapest multiple (in one sense) in 15 years, as boutique analyst Moffett Nathanson pointed out this month. TMUS stock trades at roughly 7x 2017 EBITDA on an enterprise basis — a modest premium to larger, and still more profitable, VZ.

I wouldn’t recommend a short of TMUS stock for myriad reasons — but that doesn’t, in turn, suggest that the stock is a buy. Growth will be increasingly harder to come by. M&A isn’t guaranteed. And if pricing pressures in the industry increase — as seems possible, if not likely — T-Mobile will feel those pressures as much, if not more, than its peers.

It’s been a great run for TMUS stock, and it may not be over. But it does seem like we’re closer to the end than to the beginning.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

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