• KeyBanc Capital Markets upgraded T-Mobile US (TMUS) at the end of March.
• The fight for customers has become a ruthless affair, and T-Mobile has potential to take a significant bite of market share.
• Consider buying TMUS stock rather than its competitors.

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At the end of March, KeyBanc Capital Markets analyst Brandon Nispel upgraded T-Mobile US (NASDAQ:TMUS) to “overweight” from “sector weight.” He also gave TMUS stock a 12-month price of $155.

This is quite the turnaround for the KeyBanc analyst. In August 2021, Nispel downgraded the stock from “overweight” to “sector weight,” describing T-Mobile as “Just Another Carrier” in his summer note to clients. 

The analyst’s change of heart comes down to three fundamental reasons. I’ll get into those below. In the meantime, it’s important to remember that 97% of Americans already have cell phones, so a company’s fight to grow its wireless business will have to come at the expense of competitors. That’s never an easy task.

Nonetheless, T-Mobile appears to be ideally positioned to take the fight to AT&T (NYSE:T) and Verizon (NYSE:VZ). 

TMUS Stock to Benefit From Best-in-Class 5G

Nispel’s first reason for upgrading TMUS stock is that he believes T-Mobile has the best 5G in the country in terms of performance and availability. He also sees that edge lasting for some time. Building market share involves robbing Peter to pay Paul; it helps if you have a better product than your competitors.

The Verge reported in late March that Verizon found its 5G download speeds increased when it turned on its C-band equipment in January. However, AT&T did not experience a performance boost when introducing the C-band.

T-Mobile remains the leader in download speeds. However, The Verge stated the difference between T-Mobile’s and Verizon’s mid-band download speeds was much smaller. 

Verizon and AT&T aren’t going to sit around and let T-Mobile steal their thunder. But as the analyst stated, “[W]e believe the lead is sustainable based on peers’ near term available spectrum depth and coverage targets.”

On March 30, T-Mobile announced it introduced 5G Home Internet to more than three million homes in 54 cities across Alabama, Louisiana, Mississippi and Tennessee. These states have few options for home internet, so T-Mobile jumping into the game in these areas will help alleviate rural internet access problems. T-Mobile’s 5G Home Internet is now in more than 30 million homes across the country.   

Good Margins Mean Big Profits

The analyst’s other two points go together like peanut butter and jelly. 

First, Nispel expects its service margins to rise above 50% by 2025. This means that for $1 of revenue per subscriber, its operating expenses would be less than 50 cents. He sees this happening due to lower network costs and sales-related expenses. 

As a result, the company’s free cash flow could increase from $5.64 billion in 2021 to $8.15 billion in 2022 — and higher still in 2023 and beyond. That should allow it to repurchase up to $60 billion of its stock between 2023 and 2025. 

Secondly, these cash-flow improvements will generate cash-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) growth rate of 10%, more than three times that of AT&T and Verizon.

Given its ability to grow free cash, it’s not surprising analysts like the stock. Of the 31 covering it, 27 give it a “buy” or “overweight” rating with an average target price of $168.65.  

TMUS Stock Is the Best of the Bunch

InvestorPlace’s Chris Markoch recently named TMUS one of seven stocks that were undervalued. My colleague pointed out the company is projecting its revenue will grow by 45% annually through 2024. Add its increasing profitability to this top-line growth, and you’ve got a recipe for capital appreciation. 

Year-to-date, TMUS stock is up 16%. That compares to an increase of 2.5% for Verizon and a gain of 1.5% for AT&T. Over the past year, the difference gets smaller, but T-Mobile is the only one in positive territory.

I remain adamantly against investors owning T stock. I said as much in early March. Meanwhile, I don’t have an issue if you want to own VZ shares. However, of the three, I believe TMUS stock is the best buy for the long haul because it will continue to take market share from its competitors.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.