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T-Mobile (NASDAQ:TMUS) posted better-than-expected Q1 earnings, as the carrier continues to see multiple tailwinds from its 2020 acquisition of rival Sprint. While earnings came in at $2.00 per share, revenue remained almost flat at $19.59 billion. So what lies ahead for T-Mobile stock?

T-Mobile continued to lead the industry in terms of postpaid phone net additions, adding 532,000 connections for the quarter. Although net adds were slightly lower compared to the year-ago quarter, they remain the best in the industry. Moreover, T-Mobile has been capturing a higher share of industry net customer additions led by its deployment of valuable mid-band spectrum for 5G wireless technology. The mid-band spectrum offers a good balance between speed and coverage, compared to the millimeter-wave spectrum – which offers ultra-fast speeds but weak coverage – that rivals Verizon and AT&T initially focused on.

T-Mobile has also made steady inroads into the broadband market with its fixed wireless broadband offering, using the excess spectrum it acquired via the Sprint deal. Over the last quarter, the company added 405,000 subscribers, the best in the industry, taking its total wireless broadband base to about 5 million customers. The carrier also intends to expand into the wired broadband space, partnering with private equity firm EQT to buy Lumos, a fiber network operator in the Mid-Atlantic. T-Mobile intends to grow Lumos’ fiber network from about 320,000 connections today to a total of 3.5 million by the end of 2028.

The company is also seeing a meaningful improvement in profitability led by the decommissioning of the legacy Sprint towers and the completion of the integration of the two networks. Free cash flow grew by about 39% year-over-year to $3.3 billion in Q1.

TMUS stock has shown strong gains of 20% from levels of $135 in early January 2021 to around $165 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in TMUS stock has been far from consistent. Returns for the stock were -14% in 2021, 21% in 2022, and 15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TMUS underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the mega-cap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TMUS face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

T-Mobile’s valuation on a price-to-earnings basis does appear rich versus its peers. The stock trades at about 18x forward earnings, which is well ahead of rivals AT&T and Verizon, which both trade at high single-digit multiples. That said, we think that the multiple is justified. While T-Mobile was traditionally known for its customer-friendly policies and value pricing, with the deployment of 5G the company has also emerged as one of the best networks given its wide and speedy coverage. This should enable the company to grow at a quicker pace compared to rivals AT&T and Verizon, with the potential for margin improvement via the closure of the Sprint network. Moreover, free cash flows are projected to grow to between $16.4 billion and $16.9 billion in 2024, meaning that the stock trades at less than 12x adjusted forward free cash flows. We value T-Mobile at about $176 per share, which is about 7% ahead of the current market price. See our analysis on T-Mobile valuation: Expensive or Cheap for more details on what’s driving our price estimate for the company. Also, check out our analysis of T-Mobile revenue for more details on the company’s key business segments and how revenues are likely to trend.

[1] Returns as of 4/30/2024
[2] Cumulative total returns since the end of 2016

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.