AT&T Vs. T-Mobile: Is Now The Time To Jump On The 5G Bandwagon? – Seeking Alpha

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alexsl

alexsl
It has been over half a year since I wrote about the 5G space in my February 12, 2022, article titled Potential winners in the great 5G buildout. Now that AT&T (NYSE:T) has spun off its media assets to Warner Bros. Discovery (WBD) and returned to its roots as a communications company, I decided to compare the recent performance of AT&T and its two main rivals, T-Mobile (NASDAQ:TMUS) and Verizon (VZ), as well as re-visit my outlook on the 5G opportunity.
I begin by comparing the subscriber growth, average revenue per user (ARPU), and key financials. I then provide an update on the status of the 5G buildout and current valuations before wrapping up with concluding thoughts.
All three major wireless providers – AT&T, T-Mobile, and Verizon – have grown their subscriber base over the last five years. AT&T has the largest base and T-Mobile the smallest, even after its 2020 acquisition of Sprint (figure 1).
Figure 1: Total subscriber count

Wireless telco subscriber count

Created by author using publicly available financial data

Created by author using publicly available financial data
T-Mobile’s subscriber base has increased by over 50% since the second quarter of 2020 with the close of its acquisition of Sprint (figure 2, blue line). However, its per-share subscribers has not shown the same growth due to the additional shares the company issued to complete the transaction (figure 3, blue line).
In the last two years, the subscriber and per-share subscriber count of all three major wireless providers have grown in the 10-20% range (figures 2 and 3).
Figure 2: Total subscriber growth (indexed to June 30, 2020)

Wireless telco subscriber growth

Created by author using publicly available financial data

Created by author using publicly available financial data
Figure 3: Per-share Subscriber growth (indexed to June 30, 2020):

Wireless telco per-share subscriber growth

Created by author using publicly available financial data

Created by author using publicly available financial data
T-Mobile’s ARPU has held up relatively well since 2019 (figure 4, blue line) and may have some potentially some room for rate increases as it upgrades and fills in the holes in its nationwide network. Verizon’s consumer and business ARPUs have trended down (green and orange dashed lines), as have AT&T’s Mexican segment (brown dotted line) and US Mobility segment (purple dotted line) as its mix of low revenue IOT (internet of things) device connections increases. Even though AT&T’s broadband APRU has trended up following its push into fibre (red dotted line), this segment constitutes a relatively small portion of AT&T’s revenues.
Figure 4: Average revenue per user

Wireless telco ARPU by segement

Created by author using publicly available financial data

Created by author using publicly available financial data
The weak trends are slightly surprising or perhaps disappointing to many investors and industry observers who have expected the much-heralded 5G rollout to revive revenue growth in the industry. I believe this has not happened because, as I wrote in my previous article:
Telcos have little incentive to fully fund expensive 5G buildouts until there are killer apps that enable customers to justify paying up for capabilities that can only be delivered through 5G technology. Conversely, it is difficult for developers to roll out their killer apps until the 5G networks are fully functional.
In the short term, the higher speeds of 5G will enhance existing apps in video streaming, 3D navigation, gaming, and AR/VR (augmented reality and virtual reality). It will also break the monopoly of cable and fiber to homes and business premises, as T-Mobile is doing with its home internet offering as it expands its 5G footprint.
This will drive down the cost of broadband internet service to the benefit of consumers. However, there may be little benefit for shareholders of wireless telcos until 5G killer-apps with the ubiquity and game changing impact of the likes of Netflix (NFLX), Uber (UBER), or YouTube (GOOG) (GOOGL)) are built.
Till then, the wireless providers will have to fight for market share through aggressive pricing or promotions and in lower-value internet of things applications.
Intense competition has severely limited the wireless providers’ ability to raise prices to stay abreast of inflation. Data from the Bureau of Labor Statistics shows that over the last decade, the price of phone service in the average city (figure 5, blue line) has ticked down fallen short of the consumer price index.
Figure 5: CPI compared to the price levels of telephone services

Pasted Graphic 10.png

CPI data from the BLS obtained through the St. Louis Federal Reserve FRED

CPI data from the BLS obtained through the St. Louis Federal Reserve FRED
Source: CPI data from the Bureau of Labor and Statistics, obtained through St. Louis Federal Reserve (FRED)
The growth in subscribers have been offset by declining ARPU. Over the last eight years, Verizon’s revenue has barely grown (figure 6, green line), while AT&T’s revenue increase was driven by acquisitions, including Leap Wireless in 2014, DirecTV US/Latin America in 2015, and Time Warner Inc in 2018, which it subsequently spun off in 2020) (blue line). T-Mobile’s revenue grew sharply from 2013-2019 as it nearly doubled subscribers over the period, and was further boosted by its 2020 acquisition of Sprint. However, its revenue growth appears to have plateaued over the last year (orange line).
Figure 6: Revenues of the three major wireless providers

Wireless telco revenues

Created by author using publicly available financial data

Created by author using publicly available financial data
AT&T or Verizon’s operating income margins have not expanded since 2016 (figure 7, blue and green lines), resulting in flat operating income for both companies (figure 8). T-Mobile’s operating income margin expanded through 2020 but has pulled back (orange line) and its operating income remains significantly lower than its two larger competitors.
Figure 7: Operating income margins

Wireless telco operating margins

Created by author using publicly available financial data

Created by author using publicly available financial data
Figure 8: Actual TTM operating income

Wireless telco operating income

Created by author using publicly available financial data

Created by author using publicly available financial data
Investors continue to look to the 5G rollout to jump-start revenues. After analyzing the companies’ spending on spectrum and capital expenditures as well as the growth of their key vendors, I posit that this will take time.
In my previous article, I observed:
Since 2020, wireless telcos have paid over $120 billion to acquire spectrum auctions (figure 9). Between the FCC spectrum auctions 107 and 110 in 2020 and 2022, Verizon and AT&T spent over $60 billion and $32 billion, representing about 44% and 17% of 2019 revenues respectively. In contrast, T-Mobile has bid less aggressively in the auctions as it has the necessary spectrum it acquired from both its merger with Sprint in 2020 and as part of the termination fee it earned because of the blocked acquisition by AT&T in 2011.
Figure 9: Large acquisitions of spectrum prior to and in the 2020 and 2022 FCC auctions
Prior to 2020
(including FCC Auction 103)
FCC C-band Auction 107
(September 2020)
FCC Auction 110
(January 2022)
AT&T
$207 million-FiberTower
$2.4 billion in FCC Auction 103
$24.4 billion (includes $1 billion of incentive payments)
$9.1 billion
T-Mobile
$931 million (FCC Auction 103)
$9.3 billion
~$3 billion
Verizon
2019: $898 million
2020: $2.1 billion (including FCC Auction 103)
$58.6 billion (includes $13.1 billion of incentive payments)
none
Dish
$202 million (FCC Auction 103)
$7.3 billion
Sources:
– Company 10K and 10Q filings with the SEC and www.fcc.gov
– www.lightreading.com: Shocker! Verizon was the big spender in FCC’s 5G mm Wave auction
Seeking Alpha: AT&T, Dish bid most in FCC’s latest 5G airwaves auction, while Verizon skips
There have been smaller spectrum auctions over the last six months, including one in which T-Mobile paid a relatively modest $428 million to plug up holes in its 2.5 GHz spectrum, but none have matched the scale of auctions 107 and 110.
After spending these large amounts on spectrum, the next order of business is to deploy the spectrum.
A 2020 report by McKinsey and Company warns:
As with the transition from 3G to 4G, advanced electronics companies and industrial players are still uncertain about the benefits of the new technology. Where is the value coming from, and who is going to capture it? What are the use cases where 5G performance enhancements will generate most value and demand? Which applications will most benefit from 5G? Many companies did not ask such questions when 4G emerged and only achieved subpar returns. The danger exists that this scenario could repeat with 5G.
It appears that AT&T and Verizon have learnt from this lesson and been disciplined with their capital spending relative to previous years (figure 10, rows 1 and 3). T-Mobile, on the other hand, has ramped up its spending (row 2) to take advantage of the attractive mid-frequency (2.5 GHz to <6 Ghz) spectrum it acquired with Sprint to expand its footprint, leapfrog its two larger competitors, and capture market share.
Figure 10: Capital expenditure

Wireless telco capex

Seeking Alpha financial statements

Seeking Alpha financial statements
Source: Seeking Alpha
Ericsson and Nokia are the leading providers of the radio access network (RAN) transmission equipment that is necessary for 5G service. As such, their tepid sales growth is likely to be indicative of the 5G deployment pace.
Ericsson’s year to date network sales increased by 5% on a comparable currency and units basis (figure 11, line 1), which management attributed to growth primarily in North America and Europe.
Figure 11: Ericsson Q2 2022 sales

Ericsson Q2 segment revenues

Ericsson Q2 2022 earnings report

Ericsson Q2 2022 earnings report
Sales of Nokia’s mobile networks segment declined 7% from 2020 to 2021 (figure 11). The segment’s revenue increased by just 1% on a constant currency basis in Q2 2022 compared to the year ago period, which management noted was limited by “COVID-19 related lockdowns and wider component shortages.”
Figure 11: Nokia mobile networks sales

Nokia mobile network segment sales

Nokia Q2 2022 earnings report

Nokia Q2 2022 earnings report
Tower companies provide the infrastructure to hang new 5G radio access network transmitters and are a good leading indicator of 5G adoption.
While American Tower’s (AMT) global portfolio has grown to over 218,000 towers, its US and Canada tower count has not grown significantly since 2015 (figure 12, grey line).
Figure 12: American Tower’s tower count

AMT tower count

American Tower investor presentation

American Tower investor presentation
The company’s 2022 organic tenant billings outlook (excluding the effects of the churn due to T-Mobile’s removal of redundant transmitters following its acquisition of Sprint) is expected to grow by 5% (figure 13). However, as tower revenues generally contain contractual escalators linked to the consumer price index, which has risen by 8.5% over the last twelve month, it appears that 2022 growth, after excluding the effects of inflation, will be modest at best.
Figure 13: American Tower’s organic tenant billing growth

AMT organic billing outlook

American Tower investor presentation

American Tower investor presentation
Crown Castle International (CCI) has experienced strong growth. Even though the company’s tower count has remained at roughly 40,000 since 2016, its small cell node count has increased to over 115,000, and the company reported a 60,000 contracted small cell backlog.
As 5G technology, which typically utilizes higher frequency spectrum that has shorter reach, requires denser networks of smaller towers, the growth in small cell towers that are typically perched on streetlamps or utility poles is an indicator that the 5G rollout has been concentrated in more densely populated areas.
Even though T-Mobile has less than one-fifth the operating income of AT&T and one-sixth Verizon (see figure 8 above), its market capitalization is higher than AT&T’s and nearing that of Verizon’s (figure 14, blue, green, and orange lines).
Figure 14: Market capitalization

Wireless telco market cap

Created by author using publicly available financial and stock price data

Created by author using publicly available financial and stock price data
T-Mobile’s enterprise value (EV) to EBITDA multiple of 11.2x (figure 15, purple line) is higher than that of AT&T and Verizon, which trade at an EV/EBITDA multiples of 5.7x and 8.2x (orange and blue lines) respectively. While some would argue that this measure is less relevant as it does not factor in the companies’ very significant investments in spectrum acquisitions and capital expenditures needed to buildout their networks, I believe it is a good gauge of the relative valuations of companies within the same industry.
Figure 15: Valuation: EV to EBITDA

Wireless telco EV/EBITDA valuations

Seeking Alpha charting

Seeking Alpha charting
T-Mobile’s price earnings ratio (PE) of 105x (figure 16, purple line) is significantly higher than AT&T and Verizon’s PE ratios of 7.8x and 8.4x respectively (orange and blue lines). T-Mobile would have to deliver an extraordinarily high level of consistent earnings growth to justify this premium.
Figure 16: Valuation: price earnings ratio

Wireless Telco valuation PE ratios

Seeking Alpha charting

Seeking Alpha charting
AT&T stock has a dividend yield of 6.2% and Verizon yields 6%. T-Mobile does not currently pay a dividend.
I have no doubt that in the future, many revolutionary, game changing applications in artificial intelligence, the metaverse, autonomous cars, and other areas we cannot even imagine today will be built on top of 5G technology. However, the industry faces a catch-22 situation here: telcos have little incentive to fund expensive 5G buildouts until there are “killer apps” that enable customers to justify paying up for full 5G capabilities. Conversely, it is hard for developers to roll out their killer apps until the 5G networks are functional. Absent a catalyst, investors will have to wait patiently as the industry growth continues to limp along.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of T either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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