Is T-Mobile US Inc (NASDAQ:TMUS)’s Wild Run Hitting Speed-Bumps?

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At its prime, T-Mobile US Inc (NASDAQ:TMUS)’s un-carrier initiatives shook everyone, not the least Sprint Corp (NYSE:S) that it overtook in 2Q2015 as the U.S. No. 3 largest carrier. Through its un-carrier programs, which among other things abolished restrictive two-year plans, T-Mobile managed to increaseits subscriber base significantly as subscriber churn subsided.

Network overhaul also boosted T-Mobile’s growth. Nevertheless, further growth could prove challenging for T-Mobile, part of the reason being that Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T) and Sprint all have higher amounts of low-band spectrum compared to T-Mobile. With limited low-band spectrum, further network capacity expansion may prove difficult for T-Mobile in the future.

This T-Mobile analysis examines the carrier’s strengths and weaknesses and sometimes compares its positions with the rivals to let you make informed investment decision. But first is a brief look at earnings for the last quarter.

4Q2015 highlight

T-Mobile US Inc (NASDAQ:TMUS) posted 4Q2015 EPS of $0.34, nearly triple $0.12 in a similar quarter a year earlier. Revenue reading of $8.25 billion rose 1.1% YoY and smashed the consensus estimate of $8.2 billion.

What’s exciting about T-Mobile?

  1. Spectrum position

The spectrum resource that T-Mobile US Inc (NASDAQ:TMUS) has presently appears adequate to meet its network capacity, reliability and speed needs over the near-term. The company acquired 700 MHz low-band spectrum in swap dealwith Verizon. In the top 25 major metropolitan markets in the U.S., T-Mobile’s spectrum averages 82 MHz. To boost its spectrum position, T-Mobile is expected to bid in the upcoming 600 MHz spectrum auction.

T-Mobile has also continued to expandits 4G LTE network to cover about 91% of the U.S. population or about 305 people in the country. Further coverage improvement is expected as T-Mobile leverages its Wideband LTE network based on 700 MHz spectrum. T-Mobile’s Wideband LTE currently covers about a 190 million population in more than 300 market areas.

T-Mobile acquired AWS spectrum for $308 million from US Cellular in 2013. The purchase of the AWS spectrum also enabled T-Mobile to expand its 4G LTE coverage.

  1. Continental coverage

Through its Mobile without Borders un-carrier initiative, T-Mobile offers its Simple Choice subscribers the opportunity to make international calls in the Americas without attracting extra roaming charges. The company has particularly opened the space for calls from the U.S. to Mexico and Canada under its friendly transcontinental calling service.

AT&T is only in the process of matching T-Mobile’s Mobile without Borders through the acquisition of Nextel Mexico and Iusacell in South America.

  1. T-Mobile joins the 5G race

T-Mobile US Inc (NASDAQ:TMUS) appears to be leaping ahead of rival Sprint in another hot button area – 5G networks. The carrier recently sought the permission of the FCC to trial its 5G technology. T-Mobile is working alongside Nokia Corporation (ADR) (NYSE:NOK) and Ericsson (ADR) (NASDAQ:ERIC) to test 5G networks with targeted commercial deployment in 2020 or thereabout.

Verizon and AT&T have also sought regulatory clearance to test their 5G networks in lab settings and field. Of the three national carriers drifting to 5G network technology, Verizon has made the major move on the front.

  1. Mobile video BingeOn

T-Mobile recently launched BingeOn, another version of un-carrier initiative that is focused on flexible mobile video offering. BingeOn allows subscribers to stream videos from at least 24 partner sites without eating into their monthly data plans.Early checks by independent third-party researchers showed that large proportion of T-Mobile’s subscribers was signing up for BingeOn service.

The potential problemfor T-Mobile is that such video offering could further strain its already stretched network capacity, thus impact service quality and potentially triggering subscriber outflow.

  1. Subscriber gain

T-Mobile US Inc (NASDAQ:TMUS) overtook main rival Sprint in 2Q2015 in terms of subscriber base it has never looked back. At the end of 2Q2015, T-Mobile boasted 58.9 million subscribers on its network against Sprint’s 58.7 million. By the close of 2015, T-Mobile had advanced its lead over Sprint with 63.3 million subscribers against 61.0 million subscribers on the side of Sprint.

T-Mobile’s subscriber gains came on the back of aggressive disruptive initiatives under the banner of un-carrier programs. Nevertheless, T-Mobile still has a long way to go to catch up with the national wireless market leaders AT&T and Verizon, which closed 2015 with 128.6 million and 110.8 million subscribers respectively.

  1. Sprint/T-Mobile combination

Can Sprint acquire T-Mobile? Chatters have recently increased over possible combination of Sprint and T-Mobile. It is believed that a resurgent Sprint might resume its pursuit T-Mobile to build a stronger force against the two leading carriers. But the success of such a deal will largely depend on the way a new FCC administration views such a combination.

What’s worrying about T-Mobile?

  1. Sprint as a risk

Sprint is aggressively improving its network capacity and it is threatening to pile competitive pressure on T-Mobile US Inc (NASDAQ:TMUS) in 2016 onward. Sprint is expected to leverage its 2.5 GHz spectrum portfolio to leap over T-Mobile in terms of network capacity and performance. That could trigger a massive subscriber outflow from T-Mobile, dealing it a serious setback in subscriber wins.

T-Mobile largely took advantage of Sprint’s network overhaul disruption to harvest its subscribers through the famous un-carrier initiatives. Sprint has now got its house in order.

  1. Capex growth

T-Mobile is pumping more resources into capex. This year’s capex budget is quoted in the range of $4.5 to $4.8 billion compared to $4.7 billion in 2015. Between 2011 and 2015, T-Mobile’s capex increased at compound annual growth rate of 14.7%, faster than adjusted EBITDA that only increased 8.7% in the same period.

While elevated spending has enabled T-Mobile to improve network capacity and coverage, the pace of capex growth relative to adjusted EBITDA growth suggests that the company could run into cash flow problems. That risk is heightened by T-Mobile’s expected participation in the coming spectrum auction and the massive price it continues to pay to steal subscribers from rivals.

  1. Poor networking performance ranking

T-Mobile US Inc (NASDAQ:TMUS) has its work cut out to catch up with rivals in areas of network reliability and speed. In 2H2015, RootMetrics data showed T-Mobile’s network reliability ranked below all its major rivals. With network reliability of 81.9 in scale of zero to 100, T-Mobile trails Sprint at 89.9, AT&T at 93.7 and Verizon at 96.0.

Capture

Takeaway

In the next leg of competition, there might be little for T-Mobile US Inc (NASDAQ:TMUS) to gain from its un-carrier initiatives. The company might have to look for new strategies to drive its next phase of growth as Sprint threatens to recapture its lost spot in the U.S. phone carrier ranking with a revamped network.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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