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By Petra Vacval, CFA | 07-05-2017 02:00 PM

T-Mobile Gains Momentum

We've increased our fair value estimate and moat trend rating as the company narrows the gap with its competitors.

Petra Vacval: In early June, we upgraded our moat trend rating for no-moat T-Mobile from none to positive based on T-Mobile's narrowing cost disadvantage versus Verizon and AT&T. While we don't view intangible brand and spectrum assets as a moat source for any player in the U.S. wireless industry, T-Mobile has improved on both fronts, thereby driving business growth and indirectly helping to narrow the firm's cost disadvantage. 

The company has gained momentum in the marketplace via improved network performance, innovative pricing, and catchy marketing. While none of these developments in isolation provides a long-term competitive advantage, T-Mobile has expanded its customer base nicely, modestly shrinking the gap in scale between it and larger rivals.

We also increased T-Mobile's fair value estimate to $67, while maintaining a high uncertainty rating. Our price increase was driven by a reduction in the cost of capital and assumed tax reform starting in 2018. While we expect T-Mobile's wireless service revenue growth to moderate from 2016's 12% growth rate, we still expect strong single digit growth for the next couple of years as T-Mobile works to expand distribution to the one third of the country where it currently has minimal presence. We also expect T-Mobile's margins to expand as a growing customer base enables the firm to leverage scale and save on network costs and SG&A on a per-customer basis.

While the current share price of around $60 per share is modestly below our fair value estimate, we recommend that investors seek a wider margin of safety prior to investing due to T-Mobile's high uncertainty rating.

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