2023-10-19 16:02:20 ET
Summary
- T-Mobile's Q3 earnings are expected to be in line with full-year guidance, but revenue may fall below consensus.
- Management's negative signals, such as layoffs and shareholder returns, suggest concerns about top-line growth and lack of investment opportunities.
- Analysts have revised estimates down for the quarter, and the stock price is unlikely to see significant movement following the announcement.
I am revisiting my Q1 and Q2 thesis on T-Mobile ( TMUS ) in advance of Q3 earnings, which will be released pre-market on Wednesday, Oct. 25.
In Q1 at $149.71, I rated T-Mobile a sell for the following reasons:
- I felt the wireless industry slowdown and growing value sector risked downward pressure on prices.
- Based on my analysis, industry headwinds were not reflected in earnings guidance.
- Valuation ratios were at historical highs.
In Q2, at $135.46, I improved T-Mobile from sell to hold for the following reasons:
- Valuation ratios improved due to the 9% decline in share price.
- Potential PR boost from AT&T and Verizon lead cable controversy.
- T-Mobile exceeded my expectations for volume growth but faced challenges with pricing and competition.
Today, T-Mobile sits near $140 with earnings next week. Wall Street, my fellow Seeking Alpha analysts, and the quant rating are largely bullish on the stock.
The bull case I keep seeing is that T-Mobile is better positioned in the current market than AT&T ( T ) and Verizon ( VZ ). While I completely agree with the positioning, that doesn't mean T-Mobile is fairly valued at its current price.
I'm still not convinced there's upside potential here. With negative signals coming in since Q2 earnings, mixed earnings revisions, and valuation ratios ticking back up, I maintain my hold rating on T-Mobile, with the shareholder return commitment offsetting downside risks associated with the competitive environment.
Negative Signals Since Q2 Earnings
Since Q2 earnings, management has sent several negative signals indicating long-term risk to T-Mobile's profitability.
First, on Aug. 24, T-Mobile announced a plan to lay off 7% of its workforce. While this provides a short-term lift to profitability, this signals to me that management is concerned about the ability to deliver top-line growth.
Then, on Sept. 6, T-Mobile announced a plan to return $19 billion to shareholders. This is obviously great for near-term returns, cash flow, and putting a floor on the stock price. However, this signals that management can't identify any significant investment opportunities.
On the same day, CEO Mike Sievert commented in a speech at the Goldman Sachs technology conference that the industry was more competitive than ever with growing head-to-head competition.
Lastly, the chief accounting officer and the head of the consumer group both sold significant portions of their shares in mid-September, around the $140-$142 mark.
Collectively, I feel that management has signaled a fair to overpriced valuation heading into earnings. This is consistent with the valuation multiples, which have ticked up since Q2.
Q3 Earnings Preview
T-Mobile is expected to announce EPS of $1.89 and revenue of $19.37 billion, which would keep them on track for the full-year guidance announced in Q2 earnings .
T-Mobile has a lengthy streak of beating EPS, but has more mixed results on revenue, missing roughly two-thirds of the time.
Based on management signaling, I expect EPS at or above consensus but revenue at or below consensus. This is based on the cost focus announced in August, offset against a challenging pricing environment.
In addition to management signaling, analysts have been revising estimates for the quarter down over the last 90 days.
The full-year revisions are more mixed, with 4 up revisions and 4 down revisions on EPS. Revenue has had 1 up revision and 22 down revisions.
The stock price received a boost from the early September announcement of $19 billion in shareholder returns. Since the announcement, it has largely held in the low $140s.
With the items above largely priced in and shareholder return commitment through 2024, I do not expect significant movement, either way, following the announcement, barring an unexpected change in the financials.
What I Will Be Watching
My first focus when earnings come out will continue to be T-Mobile's pricing power. I continue to be worried that a desperate AT&T and Verizon, along with the growing value segment, will force T-Mobile to compete on price to maintain market share.
As discussed in my Q2 analysis, in the Q2 2023 earnings presentation, T-Mobile reported that Postpaid ARPU was relatively flat, only growing from $48.69 to $48.73, driven by "higher promotional activity." More concerning, Prepaid ARPU was down from $38.95 to $37.98, and T-Mobile did not comment.
For long-term success, T-Mobile needs to drive increased pricing power while also maintaining or growing subscribers. Higher pricing power may edge me toward buy, while lower pricing power may edge me toward sell.
I also will be focused on additional management signals on the competitive environment, such as discussions of promotional activity, performance of prepaid versus postpaid, and any challenges from AT&T and Verizon.
Finally, I will look for any changes to earnings guidance following the upward revision in Q2 and all of the changes that have occurred during Q3. Specifically, does the company feel it can maintain revenue guidance regardless of the cost-saving benefit to EPS.
Verdict
While I don't expect Q3 earnings to move the needle significantly given the $19 billion dollar commitment to returns, I will be looking for clues on future performance.
For T-Mobile to ensure long-term success, I believe the company needs to effectively balance pricing power with the maintenance or growth of its subscriber base. Any shift in this delicate balance will influence my investment recommendation.
Based on the factors above, my current recommendation for T-Mobile is to "Hold." Before recommending a position change, I'll closely monitor the upcoming earnings announcement and any management signals concerning the competitive environment.
For further details see:
T-Mobile Earnings Preview: Pricing Power Is Key