With ample room for growth, T-Mobile should be in no hurry to merge: BTIG

T-Mobile still has plenty of opportunities to continue its impressive momentum, according to Walter Piecyk of BTIG Research. So parent Deutsche Telekom likely isn’t feeling much pressure to rush into any merger with Sprint.

The nation’s third-largest carrier posted another solid quarter in July, continuing a string of 17 straight quarters with more than 1 million new net customers and enjoying a record low branded postpaid phone churn of 1.1%. Total revenue came in at $10.21 billion, beating estimates and outpacing the $9.29 billion it saw during the same period last year.

And T-Mobile’s recent successes are no fluke, Piecyk said.

“T-Mobile is not on a hot streak,” Piecyk wrote in a BTIG blog post. “It’s called a turnaround. They now have enough scale to generate free cash flow with just 33 million postpaid phone customers and 20 million prepaid customers. Both subscriber bases will continue to rise based on market share gains. Verizon alone has 88 million postpaid phone customers that T-Mobile has barely dented. In the prime households in suburban America, where AT&T and Verizon dominate, T-Mobile’s share is less than 10%. Its share with enterprise customers and Americans over the age of 55 is even lower.”

Additionally, while analysts continue to describe the U.S. wireless market as an extremely competitive segment—an analysis the FCC has eagerly agreed with—signs indicate competition may actually be on the wane, Piecyk continued. Carriers are likely to see a return to service revenue growth next year as maturating phone payment plans shift service revenue to equipment revenue, and “industry margins are still on the rise.”

Meanwhile, T-Mobile has just begun to light up the first sites using the 600 MHz spectrum it won at auction earlier this year, enabling it to expand into rural regions and smaller cities that it had long eschewed in favor of more densely populated areas. That rollout will continue over the next few years as those airwaves continue to be freed up for wireless use.

“Going forward, T-Mobile’s use of the 600 MHz spectrum it purchased in the incentive auction over the next three years will both expand the low-band network coverage to another 50 million people and increase the speed and performance of its existing low-band suburban coverage through the use of deeper spectrum positions,” Piecyk wrote. “We also expect its store expansion in these markets to continue in 2018. We expect these investments to yield market share gains with suburban households, enterprise customers and Americans over the age of 55, all of which T-Mobile’s penetration in less than 10%.”

And T-Mobile’s latest “uncarrier” strategy of giving free Netflix access to customers with family plans is just one more example of how the carrier can come up with innovative new services to customers without having to spend big money to acquire a content or distribution partner.

“T-Mobile is in the enviable position of building the bundle from scratch with services that consumers actually want and without having to sustain legacy businesses that are in structural decline,” Piecyk concluded. “As a challenger, T-Mobile will continue to pick away at companies (including cable operators) that have to protect their high-margin, free cash flow generating businesses. We expect that free cash flow to stunt the ability of these monopolists to respond, but more importantly, prevent them from making the structural changes to their businesses that would disrupt their entire business models. That could provide easy pickings for T-Mobile for years to come, which will build the one element of every consumers bundle that will likely never get cut: wireless.”