As wireless companies begin to transition to 5G, T-Mobile (NASDAQ:TMUS) looks poised to grow faster than its peers. The Bellevue, Washington-based wireless carrier continues to gain market share as its attractive pricing continues to draw customers. This has also made T-Mobile the fastest-growing carrier regarding profits. Moreover, if successful, an upcoming merger with Sprint (NYSE:S) would bring TMUS stock on par with its larger peers.
However, T-Mobile stock has also become comparatively expensive. As its larger peers become more competitive, other wireless stocks become more attractive. Double-digit profit growth still makes TMUS remains a buy. That said, the low multiples of its peers may make T-Mobile stock comparatively less appealing.
T-Mobile Redefining Its Industry
With its “Un-carrier” strategy, T-Mobile continues to gain market share and keep its competition in check. Moreover, its aggressive price competition squeezed the margins of AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint. As a result, the company saw its profits grow at an average annual rate of 66.4% per year over the last five years.
With its rising profits, the price-to-earnings (PE) ratio has steadily fallen over the last few years. Still, at a PE of just over 21, it commands a higher multiple than its three peers. Despite its elevated valuation, growth estimated at 22.9% for this year and 20.1% for 2019 will likely continue to attract investors.
5G and TMUS stock
This indicates that it should still deliver returns to investors as this industry begins to launch their 5G wireless networks. Also, assuming the merger with Sprint occurs, only three companies will own a 5G network within the United States. With the cost to build additional networks running in the tens of billions, it remains unlikely that new competitors will emerge.
Due to speeds that will run at least ten times faster than the current 4G networks, 5G will increase the capabilities of wireless in ways yet to be realized. Still, I think 5G brings both opportunity and uncertainty to TMUS stock.
More important, it could turn some of the advantages T-Mobile enjoyed into relative disadvantages.
T-Mobile stock remains the only pure wireless stock. Both AT&T and Verizon also hold internet, landline phone, and television service businesses that have encountered challenges.
The intense price competition that T-Mobile brought to wireless along with the high costs of the 5G upgrade placed further pressure on these companies. For this reason, both stocks have fallen to lower PE ratios.
With 5G finally becoming a revenue source, industry dynamics will change. All wireless companies need to recoup their investment in 5G. This need decreases the likelihood that TMUS will instigate another round of intense price competition.
Moreover, both AT&T and Verizon have moved to recapture revenues they lost to the cable-cutting trend. As such, their financial situations appear poised to improve.
Better Value Propositions
But here’s the thing. As mentioned earlier, TMUS stock trades at over 21 times earnings. Due to their challenges, AT&T stock supports a PE of 8.8, while the multiple of Verizon stock stands at about 12.4.
Both of these stocks trade well below their average PE ratios. With improving profits from their wireless and other business, their stocks should return to PE ratios in the high teens or low-20s.
Furthermore, AT&T stock enjoys a dividend yield of over 6.5%. Holders of Verizon stock receive a return of around 4.25%. Both stocks also increase their payouts annually. Because of these payouts, shareholders in both stocks will receive pay while waiting for the stocks to return to their average multiples.
TMUS stock does not pay a dividend at all. T-Mobile’s average PE has steadily fallen from the triple digits it saw as late as 2014. Even though it will see higher profit growth than AT&T or Verizon, investors do not yet know what kind of multiple T-Mobile stock will support long term.
Given these factors, investors may want to avoid TMUS for now.
Final thoughts on TMUS stock
The successes of T-Mobile have ironically made TMUS stock a less appealing choice than that of its peers. T-Mobile has consistently taken market share and forced its two larger peers to cut prices and profit margins amid intense competition.
Unfortunately for T-Mobile, now that AT&T and Verizon have addressed their competitive threats, their low PE ratios and high dividend yields make them more attractive stocks.
Normally, I have trouble describing a 21 PE ratio coupled with almost 23% growth as a poor value proposition. However, given the low multiples, high dividend yields, and improving business conditions for AT&T and Verizon, those stocks offer more potential for return at this time.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.