T-Mobile's integration of Sprint is going well and risks are narrowing. The company is on track to cover over 200M people with mid-band 5G by the end of 2021. The author projects strong subscriber growth for T-Mobile and market share gains over the next several years as its 5G network coverage expands. New opportunities in fixed wireless broadband and mobile edge computing could further increase T-Mobile's valuation beyond current estimates that only consider its traditional wireless business. The author's "Home Run Scenario" values T-Mobile reaching $294 per share by 2024 based on robust growth across both its core wireless segments and new 5G markets.
1. 1All rights reserved, Inflection Capital Management, LLC
2021E 2022E 2023E 2024E
Year-End Value $215 $234 $264 $295
TMUS' Path To
2. Thesis & Returns Update on The New T-Mobile
Perspective: All are going well six months into the The New T-Mobile's customer/ systems integration, synergies, network build, and
financials. This significantly mitigates the risks of unexpected problems and adverse unknown-unknowns. Moreover, given the improving
offerings for 5G hardware, indications of strong consumer interest for 5G (per trends in Asia), and a compelling 5G network coverage story
for T-Mobile (100M POPs covered w/ mid-band spectrum by year-end), the time is nearing for T-Mobile to significantly increase their
brand and customer acquisition investment--that is to be the 1H'21. As such, we expect T-Mobile to capture most of the industries growth
over the near- to medium-term. Similar to LQ, analysts and PMs can now more confidently invest given that their forecasts are now more
grounded (given 2 quarters of numbers) and the near-term risks narrowed. Post the release, all sell-side estimates that we observed were
revised higher. Separately, for reference, we have been writing on TMUS since mid-2018 with the view that the Sprint merger would be
approved and that TMUS will disrupt the entire TMT industry with the acquired spectrum and 5G. Our July '20 viewpoint is here. Our
confidence in these views increased with the results from TMUS and across the industry.
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Key Points:
1) Integration complete and the 5G network build pace ramped-up and rapidly bringing real 5G coverage to the country with
>200M people to have mid-band 5G coverage by T-Mobile by the end of '21.
2) Synergies ahead: $1.2B this year and $2.4B (low-ball guidance) in '21. Synergy target to be steadily raised over the next two years.
3) T-Mobile's Financial model continues to track ahead of consensus and largely in-line with our base-case expectations. However,
we have deflated our Home Run Scenario on our better understanding of the shape of the market and potential profitability.
4) TMUS' return potential is accentuated over the next few years as the potential value creation from the merger and the industry's
transformation resulting from 5G unfold and the evidence for demonstrable valuation creation becomes obvious (none of what we
illustrate here as our Home Run Scenario is in sell-side estimates; moreover, it is also likely largely missed by the buy-side as well).
5) We view the biggest risk to TMUS to be internal and not external. Do they execute an impeccable transition to the 5G network? Do
they retain / transition / grow the Sprint subscriber base? Do they capitalize on the opportunities afforded by 5G to offer brilliant and
valued services to consumer and enterprise customers, and significantly disrupt AT&T's and Verizon's legacy positions? Can they
avoid hubris and stakeholder deftness?
Allrightsreserved,InflectionCapitalManagement,LLC
2021E 2022E 2023E 2024E
Dated 11.8.20
Year-End Value $215 $233 $264 $294
Current Price $124 $115 $115 $115
IRR 73% 37% 29% 24%
The New T-Mobile Home Run Scenario
3. 2021E 2022E 2023E 2024E
Total EBITDA-NTM $31,093 $37,778 $40,527 $43,563
Free Cash Flow $1,255 $6,362 $16,092 $18,831
Debt Paydow n $0 -$6,362 -$16,092 -$18,831
Net Debt (ex. Leases) $52,990 $46,629 $30,537 $11,706
Leverage 1.7 x 1.2 x 0.8 x 0.3 x
EV/ EBITDA-FY1 8.5 x 8.3 x 8.1 x 7.8 x
Enterprise Value $321,114 $335,481 $350,942 $361,539
Equity Value $268,123 $288,853 $320,406 $349,833
Diluted Shares Out 1,249 1,249 1,249 1,249
Per Share $215 $231 $257 $280
Revenue $624 $1,969 $3,521 $5,383
EBITDA ($376) $316 $1,143 $2,177
EV/ EBITDA-FY1 8.5 x 8.3 x 8.1 x 7.8 x
Enterprise Value $2,614 $9,207 $17,051
Excess Cash $871
Equity Value $2,614 $9,206 $17,922
Diluted Shares Out 1,249 1,249 1,249
Per Share $2 $7 $14
2021E 2022E 2023E 2024E
Dated 11.8.20
Year-End Value $215 $233 $264 $294
Current Price $124 $124 $124 $124
IRR 73% 37% 29% 24%
The New T-Mobile Home Run Scenario
T-Mobile's Traditional Wireless Biz
New 5G Markets
Explaining The New T-Mobile Home Run Scenario
Part-1: Shown below is a deconstruction of the potential value creation between the traditional wireless business and
the new opportunities that we foresee with 5G . As such, vs. TMUS' current valuation of $250B, we believe that Wall
Street will begin to value TMUS' existing wireless business at $320B for the end of 2021 based upon robust growth
customer and profit growth, and a 2022 EBITDA estimate of $31B (an estimate that will fill in during 2022); moreover,
Wall Street will also begin to attach additional value for "5G optionality". Should these segments grow as we forecast,
TMUS' stock price should increase to $294/sh by the end of 2024.
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6 All rights reserved, Inflection Capital Management, LLC
4. The New T-Mobile 2020e 2021e 2022e 2023e 2024e 2025e
Industry Postpay Phone 229,413 238,016 245,752 250,667 255,680 260,793
YoY # Ch 4,129 8,603 7,736 4,915 5,013 5,114
YoY % Ch 1.8% 3.8% 3.3% 2.0% 2.0% 2.0%
TMUS Postpaid Phone Subs 66,894 74,144 79,944 83,424 86,904 89,688
Net Adds 7,250 5,800 3,480 3,480 2,784
TMUS Share 29.2% 31.2% 32.5% 33.3% 34.0% 34.4%
TMUS Adds / Industry Adds 84% 75% 71% 69%
Others 162,519 163,872 165,808 167,243 168,776 171,105
YoY % Ch 0.8% 1.2% 0.9% 0.9% 1.4%
Service Revenue 54,845 60,312 65,944 71,096 74,998 79,228
EBITDA ex. Lease Revenue 22,800 22,966 31,093 37,778 40,527 43,563
Service Margin 41.6% 38.1% 47.2% 53.1% 54.0% 55.0%
2021E 2022E 2023E 2024E
Total EBITDA-NTM $31,093 $37,778 $40,527 $43,563
Free Cash Flow $1,255 $6,362 $16,092 $18,831
Debt Paydow n $0 -$6,362 -$16,092 -$18,831
Net Debt (ex. Leases) $52,990 $46,629 $30,537 $11,706
Leverage 1.7 x 1.2 x 0.8 x 0.3 x
EV/ EBITDA-FY1 8.5 x 8.3 x 8.1 x 7.8 x
Enterprise Value $321,114 $335,481 $350,942 $361,539
Equity Value $268,123 $288,853 $320,406 $349,833
Diluted Shares Out 1,249 1,249 1,249 1,249
Per Share $215 $231 $257 $280
T-Mobile's Traditional Wireless Biz
The Home Run Potential for the Existing Wireless Business
Part-2:
Shown below is our forecasts for the primary drivers of the existing wireless business' forecasted EBITDA. We are
assigning a valuation of $320B to the business as Wall Street draws onto a $31B EBITDA # for 2022. Crucial to our
forecasts are strong ongoing subscriber gains fueled by >3% industry growth and share losses by Verizon or AT&T
. Verizon is at risk due to an inferior and "late" 5G network strategy. AT&T is at risk due to unruly business complexity,
a history of mis-execution, and zero evidence that their content + wireless consumer strategy has consumer appeal and
marketplace effectiveness. We also expect, T-Mobile to earn more 5G revenue from more devices and more data usage
(i.e. higher-tier plans). Margin expansion at TMUS is also a critical driver of value creation. The forecasted margin of
55% for 2025 is far below the average of Verizon's and AT&T's, i.e. there is upside-risk. It will reach their levels in later
years as growth slows.
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All rights reserved, Inflection Capital Management, LLC
5. The New T-Mobile New
5G Markets 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Transformation Lifts $-m illions
Fixed Broadband (i.e. home broadband w/ signal going from c ellular radio to a 5G antenee plac ed in a window)
Total Broadband Sub Mkt 100,919 102,937 104,996 107,096 109,238 111,423 113,651 115,924 118,243 120,608
Market Share 1% 3% 5% 7% 8% 8% 8% 8% 8% 8%
Subsc ribers 1,009 3,088 5,250 7,497 8,739 8,914 9,092 9,274 9,459 9,649
ARPU $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00
Revenue $606 $1,853 $3,150 $4,498 $5,243 $5,348 $5,455 $5,564 $5,676 $5,789
Expense $750 $1,374 $2,022 $2,696 $3,069 $3,121 $3,175 $3,229 $3,285 $3,342
EBITDA (50% incremental) ($144) $479 $1,128 $1,802 $2,174 $2,227 $2,280 $2,335 $2,391 $2,447
Mobile Edge Compute MEC
PaaS/SaaS per Gartner ($ B) $37 $60 $96 $114 $133 $155 $177 $199 $221 $243
US @70% $26 $42 $67 $80 $93 $109 $124 $139 $155 $170
33% Size of PaaS/SaaS $9 $14 $22 $26 $31 $36 $41 $46 $51 $56
Penetration 2% 8% 16% 32% 64% 82% 100% 100% 100% 100%
US Industry ($B) $0 $1 $4 $8 $20 $29 $41 $46 $51 $56
Operator Take (30%) $0 $0 $1 $3 $6 $9 $12 $14 $15 $17
TMUS Market Share 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%
Revenue ($ M ) $18 $116 $371 $885 $2,065 $3,083 $4,293 $4,827 $5,360 $5,894
Expense $250 $279 $356 $510 $864 $1,169 $1,533 $1,693 $1,853 $2,013
EBITDA (70% incremental) ($232) ($163) $15 $375 $1,201 $1,913 $2,761 $3,134 $3,508 $3,881
New 5G Markets
Revenue $624 $1,969 $3,521 $5,383 $7,308 $8,431 $9,748 $10,391 $11,036 $11,683
EBITDA ($376) $316 $1,143 $2,177 $3,375 $4,140 $5,041 $5,469 $5,898 $6,329
EV/ EBITDA-FY1 8.5 x 8.3 x 8.1 x 7.8 x 7.6 x 7.4 x 7.2 x 6.9 x 6.7 x 6.5 x
Enterprise Value $2,614 $9,207 $17,051 $25,691 $30,597 $36,134 $37,988 $39,660 $41,148
Excess Cash $871 $2,221 $3,877 $5,893 $8,081 $10,440 $12,972
Equity Value $2,614 $9,206 $17,922 $27,912 $34,474 $42,027 $46,069 $50,100 $54,120
Diluted Shares Out 1,237 1,237 1,237 1,237 1,237 1,219 1,184 1,149 1,109
Per Share $2 $7 $14 $23 $28 $34 $39 $44 $49
Foresee that high
competition in the
market significantly
limits pricing and
TMUS' share.
Assumes that MEC
tracks Paas/Saas with
a five year delay &
that MEC is only half
the size of these two.
Take rate for the
facilities operator for
running AMZN / MSFT
/ GOOGL edge
products.
The Value for "5G optionality" for The New T-Mobile
Part-3:
o Shown below is our forecasts for the new markets the we foresee coming from 5G.
o Both T-Mobile and Verizon were optimistic on fixed-wireless broadband.
o T-Mobile spoke of expanding fixed-wireless broadband trials (to over 450 cities) during the Q3 call and one would
expect the topic to be a meaningful part of its Q1 investor day. T-Mobile's focus is primarily rural and other
underserved markets--those without a strong incumbent.
5
Other "Platform" and "sharing-
opportunities" exist for
advertising, subscriptions,
VR/AR, payments, healthcare,
manufacturing, autonomous,
and the 5G KILLER APP.
Allrightsreserved,InflectionCapitalManagement,LLC
6. Subscribers:
o T-Mobile produced solid subscriber growth in Q3, despite the discontinuation of the Sprint brand and AT&T's aggressive phone
promotions to lock-in subscribers which materially decreased its churn of subscribers onto the market (a YoY delta of 500K).
Additionally, we suspect that T-Mobile's customer acquisition efforts have been dialed back as it put the priorities of getting Sprint
integrated and setting up to capture the merger synergies.
o Looking forward to 2021, we expect the market's growth to accelerate due to consumer interest in 5G and better connectivity (similar
to as why fixed-line broadband accelerated this year).
o In our Home Run Scenario, we foresee T-Mobile capturing the majority of that market expansion due to the reversal of that shared in
bullet-1, a step-up in business development efforts in enterprise and government (underpenetrated markets for them at only 9 pts vs.
29% overall), gains in rural markets due to more stores and better coverage (also an underpenetrated market for them), lower Sprint
churn, and a significant nationwide marketing effort touting its 2.5GHz 5G coverage of >100M POPs. This campaign's objective
would be to position T-Mobile as "the best network" and the "network that offered real 5G value to everywhere--not just mmW
hotspots." I.e. to be the provider to subscribe to if you want 5G. Historically, "network focus / prioritization" is the more premium-end of
the market; thus, T-Mobile is making a frontal assault on Verizon's and AT&T's customer base. That market share capture should
continue for the next few years until Verizon deployes its CBAN 5G (vs. its current more limited and spot-specific mmW coverage).
6All rights reserved, Inflection Capital Management, LLC
The New T-Mobile 1Q20 Q2'20 3Q20 4Q20 2020e 2021e 2022e 2023e 2024e
Industry Postpay Phone 225,894 224,748 226,873 229,413 229,413 238,016 245,752 250,667 255,680
YoY # Ch 2,125 2,540 4,129 8,603 7,736 4,915 5,013
YoY % Ch 2.7% 2.4% 2.6% 2.7% 1.8% 3.8% 3.3% 2.0% 2.0%
TMUS Postpaid Phone Subs 64,852 65,105 65,794 66,894 66,894 74,144 79,944 83,424 86,904
Net Adds 253 689 1,100 7,250 5,800 3,480 3,480
TMUS Share 28.7% 29.0% 29.0% 29.2% 29.2% 31.2% 32.5% 33.3% 34.0%
TMUS Adds / Industry Adds 84% 75% 71% 69%
In recent years, TMUS has captured 60-70% of
the market's growth. Being the "challenger" and
disruptor allowed them to do so. Over the next
few years, we expect that win rate to continue
because it will have the market's best network
and best price, and for the reasons noted
above.
Key Focal Points / Drivers Over Next Year for Home Run Scenario
7. The New T-Mobile 2020E 2021E 2022E
Service revenues $54,851 $60,363 65,995
YoY $ ch $2,824 $5,512 $5,632
Growth Factor 1.5 x 2.0 x 1.0 x
% yoy growth 5% 10% 9%
Equipment revenues 19,744 27,061 25,873
Legacy Other revenues 1,046 800 800
Total revenues $75,642 $88,224 $92,668
% yoy growth 3.4% 16.6% 5.0%
Synergies
COGS-Cumulative ($4B rgt) -600 -1,600 -4,000
SG&A-Cumulative ($2B tgt) -600 -2,000 -3,000
Total -1,200 -3,600 -7,000
Cost of equipment 17,333 24,355 23,286
% of Equipment Revenue 87.8% 90.0% 90.0%
Network expense 12,911 13,729 11,950
% of Service Revenue 23.5% 22.7% 18.1%
ex-Synergies 24.6% 25.4% 24.2%
SG&A ex. SBC 18,887 20,331 19,805
% of Service Revenue 34.4% 33.7% 30.0%
ex-Synergies 35.5% 37.0% 34.6%
YoY $ ch ex. Synergies $2,844 $474
EBITDA ex SBC 28,006 30,370 38,174
Equipment Lease Rev & EBITDA -$5,331 -$7,306 -$6,986
Historic EBITDA Definition $22,675 $23,063 $31,188
YoY $ ch Adj. $389 $8,125
YoY $ Ch ex. Synergies -$2,011 $4,725
Key Focal Points / Drivers Over Next Year for Home Run Scenario
7
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Equipment revenue and cost for new 5G phones will
be a major driver of revenue and expense in '21, as
well as the 5G network's depreciation and cost.
Guidance for 2021's synergies is $2.4B. We expect
that to be raised throughout the year to $2.6B given
prior precedent and the "beat & raise" style of
management
Additionally, we expect that total synergies exceed the
currently stated target of $6B, which is more and
earlier than guided.
Cost of Equipment relative to revenue is a critical
determinant of profits and indicator of the industry's
competitive intensity. We are modeling a slight
increase in that intensity.
We suspect that most of the near-term network
synergies are going to be obfuscated by the start-up
costs for the 5G network. However, as the penetration of
5G subscribers increases, eventually the duplicative 4G
costs will be "decommissioned" and where the 5G
network's fixed costs significantly leverage.
We expect that most of the near-term SG&A synergies to
be re-invested in growth, such as business development
efforts in the underpenetrated sub-segments of the
market and in a large nationwide marketing campaign to
drive awareness of T-Mobile's 5G network and coverage
and elevate the T-Mobile network's brand equity.
However, in '22 the synergies should show through as investments
are curtailed; that in combination with significant revenue growth, will
allow for a powerful EBITDA year in '22.