Summary
It is proposed to hold these shares for several reasons. Firstly, the company operates in the information technology and communications sector, successfully implementing innovations and diversification of services, which lead to a significant increase in profits of up to 300%, and positively affect EBITDA, which shows the company’s efficiency. Current news shows that the company remains willing to invest in promising technologies like 5G, with segmented revenue reflecting long-term success in services and equipment sales. The company’s net income is also growing, highlighting cash and current assets in the cash flow in the possibility of further spending on R&D. Even external factors, such as the 2020 pandemic and the 2008 crisis, have little effect on financial stability. Comparison with competitors is significant since T-Mobile has the highest 5Y return, and organizations in this area often combine to achieve technological goals; therefore, this company plays the first role in such alliances and can attract investors who diversify portfolios in a particular area.
Cash flow from investing activities is consistently negative, which aligns with T-Mobile’s significant projects and plans in this area. EPS is projected to triple in the next two years as innovation progresses and revenue grows, but it is still stable enough to minimize holding risks. While there were significant share capital gains in 2012 and 2020, this growth has been accompanied by significant headcount expansion and investment in innovation, which has historically paid off such projects. Negative retained earnings show the company’s involvement in R&D activities. At the same time, the company does not pay dividends, which forces investors to watch the dynamics of trading in order to make a profit. From this point of view, such shares act primarily as a stable preservation of the investor’s assets, protected from the risks of inflation or other macroeconomic factors, but in the long run, they can bring profits that exceed the growth of inflation (Finance Yahoo, 2022). Against the background of positive dynamics of financial indicators, T-Mobile continues to carry out M&A deals, hunting for the most promising startups and announcing new products, which signals dense work in the field of innovation. This factor is critical in the field of IT; therefore, holding shares can be a tool to preserve assets and support developments that can lead to an increase in the price of shares of this company. Finally, it is worth noting the company’s cooperation with government agencies, which leads to the receipt of appropriate grants and subsidies, as well as diversification into the T-Mobile TRAVEL area, which is one of the organization’s priorities at the moment, which significantly diversifies the potential for products and revenue growth.
Valuation
Using the discounted cash flow methodology, the cost of equity was calculated using a capital asset pricing model. The risk-free rate of 3.63% reflects the current yield on 10-year US Treasuries. The market risk premium of 8% was derived based on the Fama/France three-factor model, taking into account historical and forecast market risk. A Beta value of 0.80 was calculated by running a linear regression of historical TMUS returns against the S&P 500 for two time periods five-year monthly and two-year weekly. The results were averaged and weighted accordingly. Applying the above inputs to the CAPM approach gives a Ke of 7.13%. Assuming a stable capital structure over the forecast horizon, the estimated WACC is 5.34%, which is a good enough figure to impact the company’s market value positively.
The target price is set as a weighted average between the P/E and EV/EBITDA methods and is equal to $188.43, which translates into a recommendation to hold the shares, as the expected growth will be almost 29%. EPS will increase accordingly, given the small values of profit growth for the following year. The dynamics of the company’s net profit margin have a high amplitude, which is caused by R&D expenses and, to a lesser extent, external factors. The profit forecast is linked to the current downward trend in the net profit margin, and as a result, even with such relatively pessimistic forecasts, a significant increase in shares is expected, which in recent months has again taken an upward course. To a greater extent, further growth will depend on the speed of implementation of 5G technology and developments in this area, as well as the effective use of the services of companies absorbed this fall, such as Shenandoah Telecommunications Company. At the same time, it should be taken into account that the company’s services and equipment are pretty diversified, from communications to solutions in the form of robotic vacuum cleaners, and therefore, the risks are significantly reduced in this forecast. It is also worth noting that T-Mobile shows revenue growth with relatively flat rates of positive gross margin dynamics in the core business segment – telecom carriers and services and equipment sales. When analyzing the sensitivity, one can notice a direct correlation between these three indicators; an increase in one of them leads to an expansion of the potential in others.
Reference
Finance Yahoo. (2022). T-Mobile US, Inc. (TMUS). Web.