This has so far been a good year for investors in T-Mobile (NASDAQ:TMUS). Year-to-date, TMUS stock is up about 11%. In comparison, the Dow Jones U.S. Select Telecommunications Index is down 3%.
The Bellevue, Washington-based wireless carrier has recently been in the news as on April 1, it closed the long-awaited merger deal with Sprint. As a result, the U.S. now has three wireless giants in AT&T (NYSE:T), T-Mobile and Verizon (NYSE:VZ).
T-mobile is expected to report Q1 earnings on Thursday, so investors are wondering if now may be a good time to buy into the stock. If you are not yet a shareholder, you may want to analyze the metrics before committing new capital in the company. You may also consider buying the dip in TMUS stock, especially if there is a decline toward $80.
Long-Term Tailwinds for TMUS Stock
The merger. InvestorPlace contributor William White reported the recently completed merger between T-Mobile and Sprint. He highlighted the two main benefits as “the ability to cut costs through synergies and expand networks to compete with rivals.”
With this deal, their retail subscriptions market shares may change in the coming months. As of the third quarter last year when there were four main carriers (including Sprint), AT&T had the largest share (39.9%), followed by Verizon (29.2%), T-Mobile (16.4%) and Sprint (13.3%).
It would be also important to mention the wholesale mobile virtual network operators (MNVOs). Over the years, both T-Mobile and Sprint expanded market share in the prepaid market. For example, Metro, Ting, Simple Mobile and Red Pocket run on T-Mobile.
Recent research led by Nicholas Economides, an economics professor at New York University, highlighted that these are “the two largest companies in the wholesale market, accounting for nearly 68% of U.S. wholesale connections.”
The two companies now may be able to take their combined strength in wholesale operations to make further inroads in retail operations, too.
5G growth. All U.S. mobile firms have been investing heavily in 5G. And a large number of analysts expect the merged company to compete with the other two more effectively.
In February, then-CEO John Legere said, “the new T-Mobile will be … great for consumers and great for competition. The broad and deep 5G network that only our combined companies will be able to bring to life is going to change wireless … and beyond.”
The group claims that it can now “deploy a higher quality … network for rural America.”
And the Street seems to agree. Over the past year, TMUS stock is up around 25%, currently hovering around $90. The 12-month median share price forecast now stands at $104.
Short-Term Headwinds for TMUS Stock
The pandemic. As part of the regulatory approval of the merger, T-Mobile agreed that it will not increase prices on plans for three years. It is also expected to offer 5G connectivity at no additional charge.
Amid the COVID-19 outbreak, investors have been wondering whether T-Mobile would be able to immediately work on the logistics of the now legally completed merger. In a recent interview with CNBC, CEO Mike Sievert said that the pandemic may have an adverse effect on obtaining some required permits.
Since mid-March, about 80% of T-mobile stores have closed. The company has also given customers unlimited data for two months at no extra charge.
It is not yet clear what the full economic effect of the pandemic or a potential recession will be on T-Mobile. Therefore, the upcoming earnings release will be quite important.
Volatility around earnings. When T-Mobile reported Q4 results in February, it announced diluted earnings per share of 87 cents on revenue of $11.88 billion. That beat analysts’ expectations.
The group breaks revenue into:
- Service revenues (about 73.5%);
- Equipment revenues (about 24%);
- Other revenues (about 2.5%).
The Street will analyze each segment in the Q1 results to see how soon it will be possible to look beyond the pandemic. And while long-term investors would like to see the price staying over $90, short-term traders will likely keep it between $80 and $90.
The Bottom Line on TMUS Stock
The recent deal between T-Mobile and Sprint is possibly one of the most significant corporate developments of 2020. The continued uncertainty around the global pandemic coupled with volatility that usually accompanies any earnings season will likely pressurize TMUS stock price in the short run.
If you already own T-Mobile stock, you might want to stay the course and hold onto your position. Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon. Such a covered call position would offer you some downside protection. It would also enable you to participate in a potential up move.
However, I believe investors with a two to three-year horizon may want to do further due diligence on the stock and get ready to buy into potential short-term declines. In several years, I expect the company to reap the benefits of the merger both in retail and wholesale markets. And that could easily push the stock over $100.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she holds SLB covered calls (April 17 expiry).