Where T-Mobile goes from here

As T-Mobile approaches its sixth year under the “Un-carrier” branding, the question now is: Where will it go from here?

A pair of Wall Street analyst reports argue that T-Mobile still has opportunities to grow via a number of avenues including by efforts inside the wireless industry, from actions in adjacent industries, via improved financials, and through potential mergers and acquisitions.

Here’s a breakdown of what Wall Street research firms Barclays and Cowen are saying about T-Mobile’s business in 2018 and beyond:

Growth inside wireless

T-Mobile has said that it expects to gain 2-3 million new customers this year—a figure that worried some analysts because it’s a smaller growth range than the company provided at the beginning of 2017 and decidedly lower than the 3.6 million customers that T-Mobile ended up acquiring over the course of last year.

However, the analysts at Cowen said they recently met with T-Mobile’s management and came away with a rosy outlook for the company. “Management noted it intends to beat guidance,” the analysts wrote.

And in their report, the analysts at Barclays offered a detailed look at how that growth may happen throughout 2018 and beyond. Specifically, the firm said T-Mobile likely will continue to grow in urban and existing markets while concurrently expanding into market sectors where it doesn’t currently enjoy much share, such as the enterprise market.

Further, the firm said that T-Mobile’s 700 MHz and 600 MHz network build-out efforts will essentially expand the carrier’s service into a third of the country where it didn’t previously compete. That action—coupled with roughly 1,500 new retail stores the company expects to open this year (mainly through independent outlets)—will greatly increase T-Mobile’s addressable footprint.

“Steady execution in its existing footprint and the ability to replicate its marketable share in its new footprint yields a ~15-19M subscriber opportunity representing 25-30% of its existing base of 58M,” the analysts at Barclays wrote, adding that they raised their expectations on T-Mobile’s first quarter to 605,000 new postpaid phone customers, up from a prior expectation of 575,000.

Growth in adjacent industries

T-Mobile purchased TV provider Layer3 last year for $325 million. The Cowen analysts said T-Mobile will spend roughly $150 million this year on Layer3 in order to deploy what some T-Mobile executives have described as “phase one” of T-Mobile’s TV play.

Although T-Mobile hasn’t said much about its plans for Layer3, the company has promised to launch some kind of video service using its Layer3 acquisition this year. Company executives have described the TV industry as dominated by slow-moving cable TV companies and as a sector ready for disruption, and hinted at a service that would combine standard TV with streaming options alongside social videos.

Although neither the Barclays nor the Cowen analysts offered a prediction as to what T-Mobile might ultimately do in the TV industry, it nonetheless represents the company’s desire to expand beyond wireless.

Improving financials

T-Mobile’s management has said the carrier will soon begin a significant share buyback program—a tactic often used by companies flush with cash. The analysts at Cowen said they expect that effort to stretch over three years and total a whopping $10 billion or more.

Moreover, the analysts at Barclays pointed to tax reform and expanding margins as evidence of the company’s improving financial footing. And that situation could give T-Mobile far more financial options.

“Based on our current estimates, we forecast cumulative FCF [free cash flow] generation of $13.5Bn through 2020,” the Barclays analysts wrote. “If management keeps leverage levels at the low-end of its stated range (i.e. 3x) it would result in an incremental $5-10Bn of additional capital resources.”

Mergers and acquisitions

Finally, the analysts at Cowen offered additional insights into T-Mobile’s chances to merge with Sprint—a merger that the companies negotiated throughout 2017 but that they eventually walked away from in November.

“Management continues to stress ‘never say never’ but Sprint’s deeper commitment of a network buildout with new tower co. MLAs takes away from previous synergies that a combined company would have contemplated, hence a lower takeout price that T-Mobile could offer if it were to try again,” the Cowen analysts wrote.

Interestingly, the analysts said that T-Mobile’s merger plan with Sprint last year involved shutting down around 30% of Sprint’s cell sites and then deploying Sprint’s 2.5 GHz spectrum nationwide. However, now that Sprint is embarking on its own major 2.5 GHz spectrum build-out with up to $6 billion in cash this year from parent SoftBank, the Cowen analysts noted that synergies between T-Mobile and Sprint are now much lower.

But T-Mobile for its part continues to look at additional, smaller acquisitions. “We're looking at tuck-in acquisitions that can strengthen certain of our other growth adjacencies that we're doing, but that's not going to be a material user of cash out there,” T-Mobile CFO Braxton Carter said earlier this month.