T-Mobile’s 1Q24 Earnings and Future Prospects: A Detailed Analysis

T-Mobile (NASDAQ: TMUS) delivered robust 1Q24 earnings results, aligning closely with the management’s guidance. However, the company’s growth prospects face challenges due to the shrinking postpaid phone net adds pool and increased competition from cable companies. This analysis will delve into T-Mobile’s latest financial performance, competitive landscape, and potential challenges in the future.

Financial Highlights from 1Q24

T-Mobile reported strong financial results for the first quarter of 2024, in line with management’s guidance provided in 4Q23. Some key takeaways from the earnings report include:

• Service Revenue Growth: T-Mobile’s service revenue increased by 3.5% year-over-year and 0.3% quarter-over-quarter to $16.1 billion. The growth rate in postpaid phone revenue was 4.6% year-over-year and 0.8% quarter-over-quarter.
• Fixed Wireless Access (FWA) Growth: FWA revenues surged by 23% year-over-year, but net adds decreased to 405,000 from the historical range of 500,000 to 550,000.
• Equipment Revenue Decline: Equipment revenue declined by 13% year-over-year and 22% quarter-over-quarter due to reduced upgrade activity.
• Adjusted EBITDA and Margins: Adjusted EBITDA grew by 6.3% year-over-year and 5.9% quarter-over-quarter, with operating income increasing by 18% year-over-year and 15% quarter-over-quarter. Adjusted EBITDA margin reached 39%, a significant improvement from previous quarters.
• Net Income and Free Cash Flow (FCF): Net income reached $2.4 billion, marking a 22% year-over-year and 18% quarter-over-quarter increase. Post share-based compensation, FCF stood at $3.2 billion.

Overall, the company’s performance met or exceeded expectations in terms of revenue and profitability, leading to an upward revision in its full-year guidance.

Competitive Landscape and Challenges

T-Mobile’s growth prospects face challenges due to the competitive landscape in the telecommunications industry:

• Cable Company Competition: T-Mobile’s net additions in the postpaid phone segment slightly decreased to 532,000 in 1Q24. The company accounted for 34% of the total net additions among major mobile network operators (MNOs) and cable companies such as Charter (NASDAQ: CHTR) and Comcast (NASDAQ: CMCSA). The shrinking pool of potential postpaid phone customers and competition from cable companies put pressure on MNOs.
• Pricing Pressures: T-Mobile recently introduced a premium plan priced higher than those of competitors Verizon (NYSE: VZ) and AT&T (NYSE: T), but average revenue per user (ARPU) has remained relatively stagnant.
• Fixed Wireless Access (FWA) Slowdown: Although FWA has driven top-line growth, its growth is starting to slow down due to factors such as recent price increases and competition from cable companies.

Opportunities and Initiatives

Despite challenges, T-Mobile has several opportunities and initiatives that could drive future growth:

• Fiber Expansion: T-Mobile’s expansion into the fiber space through a joint venture with EQT to acquire Lumos may provide attractive returns due to its relatively low buildout cost.
• Operational Efficiency and Share Buybacks: The company has realized synergies from its merger with Sprint, which has contributed to lower operational costs. Additionally, T-Mobile has planned a shareholder return program, including dividends and share buybacks, which may boost its stock price.

Valuation and Future Outlook

T-Mobile shares are currently trading at a premium compared to competitors, with a forward price-to-earnings (P/E) ratio of 17x and a trailing twelve-month free cash flow (FCF) yield of 5%. The market anticipates over 20% earnings per share growth in the next three years. However, given the limited expansion of the postpaid phone total addressable market (TAM), ongoing competition from cable companies, and slowing FWA growth, there is skepticism around T-Mobile’s ability to sustain such high growth rates.

Conclusion and Investment Recommendations

Overall, T-Mobile’s 1Q24 earnings results were solid, but its growth prospects face headwinds due to market saturation and increased competition. The company’s expansion into the fiber space may provide some opportunities for growth, but the premium valuation over its competitors suggests that the market may be overestimating T-Mobile’s future growth potential.

Given the company’s strong 1Q24 results but uncertain growth prospects and high valuation, investors may consider re-evaluating their positions. For those with existing positions, holding or reducing exposure might be appropriate. For potential investors, waiting for a more attractive entry point might be a prudent approach. Therefore, we change our “HOLD” rating to “SELL.”