2. T-Mobile US, Inc. (NASDAQ: TMUS)
Value: $315,358,000
Change in Position Size: 17%
Percent of Stan Druckenmiller’s 13F Portfolio: 8.5%
T-Mobile ranks 2nd on the list of Billionaire Stan Druckenmiller’s top 10 stock picks. The wireless network operator recently disclosed Ultra Capacity 5G at the Miami Veterans Affairs (VA) Healthcare System, providing spectacular 5G internet speed and performance to its frontliners and patients. T-mobile serves more than 50 VA Healthcare Systems in the country, providing 4G LTE wireless connectivity. With its current $122.4 billion market capitalization, TMUS delivered a 32.94% return in the past 12 months.
As of the end of the fourth quarter, 103 hedge funds in Insider Monkey’s database of 887 funds held stakes in Citigroup Inc., compared to 94 funds in the third quarter. Viking Global is the biggest stakeholder in the company, with 8.7 million shares, worth $1.1 billion.
“T-Mobile US, Inc.’s (“TMUS”) 2020 merger with Sprint Corporation (“Sprint”) was transformational. The company now controls c.45% of low/mid-band spectrum (which is crucial for 5G) but has only 29% of industry subscribers. We expect this gap to narrow over time, via market share gains, while the deal will also generate significant merger synergies; TMUS should, consequently, achieve substantial profits and free cash flow growth over the next 3-4 years.
TMUS has, hitherto, had an inferior network to its peers, and achieved its subscriber growth via very effective marketing and lower prices, encapsulated in its ‘un-carrier’ approach.
In the 5G era, however, it will have a much better network than its peers – as well as lower prices – because it has more of the critical mid-band (2.5GHz) spectrum than AT&T Inc. (“T”) and Verizon Communications Inc. (“VZ”) combined.
The value of this advantage is reflected in the very aggressive C-Band auction currently underway, in which all three companies have likely spent heavily; T and VZ to supplement their holdings of the key enabling asset for the new 5G era, and TMUS to reinforce its advantage and force its peers to leverage up, so they will be less likely to compete on price. The proceeds from this auction have already reached $81bn (and will entail further substantial spending to ready it for use).
Thus, TMUS is targeting the rollout of its 2.5GHz spectrum across 100mn and 200mn POPs by the end of 2020 and 2021 respectively; this will allow it to offer average speeds of 300Mbps (peak speeds >1Gbps) to subscribers (using only 60MHz of the total 160MHz it owns). Its coverage/offer will be far superior to the competition: T’s standard 5G speeds are 40-60Mbps (i.e. barely faster than 4G LTE); VZ’s 5G ultra-wideband network will offer faster speeds (in theory up to multi-Gbps) but currently covers only 2mn POPs, and is difficult to scale because the mmWave spectrum, on which it relies, propagates only over very short distances and is subject to interference (e.g. by foliage).
It is unlikely that the C-band auction will allow T/VZ to rectify their considerable spectrum lag relative to TMUS: 280MHz is being sold, and VZ requires c.190MHz and T c.150MHz to match TMUS. And the spectrum will take considerable time to clear and be deployed (120MHz clears in December 2021 and 160MHz in December 2023). It is also worth noting C-Band is not nearly as good as TMUS’ 2.5GHz – it has weaker propagation characteristics, thus requiring a much denser network grid which is more costly.
We forecast TMUS to grow its market share of subs by only 100bps per annum 2021-2024, i.e. in line with its prior rates, despite having a better network and cheaper pricing than T/VZ. The key risk to this is stronger competition from Dish Network Corp (“Dish”), who must build out a 5G network as part of the TMUS/Sprint merger conditions. However, it will take time for it to truly be a viable competitor (it targets 50% US POP coverage by 2023), and T/VZ likely have more to lose from a new competitor given their higher prices.
The company has guided to $6.7bn of cost synergies over the next 3-4 years. These have so far come in faster than expected, and we feel that TMUS may exceed its guidance (it beat its targets for the MetroPCS acquisition by 40% and achieved them 1 year early). Network costs represent 63% of expected synergies, and these are cost savings from the decommissioning of cell sites, as the company moves from 110K today to 85K over the next few years. Back office and sales and marketing cost saves will yield the rest.
We estimate that costs/sub will drop from their current c.$26 to c.$19 by 2024 (broadly in-line with VZ) helping drive service margins from 40% to 56%, in-line with T but still well below VZ’s 66% (reflecting TMUS’ lower prices). The combination of modest 3-4% per annum revenue growth, high cost take-out, and declining capital intensity should drive normalised FCF/share to c.$16 in 2024 implying a multiple of c.9x. We feel this is attractive given TMUS’s spectrum advantages and its position as the lowest price, i.e. most competitive, service provider.”
